MXC

MEXCO ENERGY CORP - 10-K Summary (Fiscal Year Ended March 31, 2007)

Business Context and Reporting Period

Mexco Energy Corporation is an independent oil and gas company engaged in the acquisition, exploration, and development of properties primarily in the United States, with a focus on West Texas. The company operates under the full cost method of accounting. This report covers the fiscal year ended March 31, 2007. As of the reporting date, the company had approximately 1,780,841 shares of common stock outstanding. Nicholas C. Taylor, the President and CEO, beneficially owns approximately 50% of the outstanding shares.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased by approximately 20% ($747,239) compared to fiscal 2006. This was driven by a 22% decrease in average natural gas prices (from $7.51 to $5.82 per Mcf) and an 8% decrease in gas production volumes, despite an 8% increase in average oil prices.
• Profitability: Net income decreased by 23% to $608,385. Operating income fell from $1.11 million to $594,876.
• Cost Structure: Production costs increased slightly by 3% to $870,778 due to higher lease operating expenses. However, interest expense dropped significantly by 76% to $24,046 due to lower average borrowings.
• Reserves: Proved reserves increased to 6.905 Bcf of natural gas and 220,000 barrels of oil. The present value of proved reserves rose to approximately $26 million, reflecting upward revisions and acquisitions.
• Capital Expenditures: The company spent $1,545,023 on oil and gas property acquisitions and development, funded primarily by cash from operations.

Outlook, Risks, and Management Commentary

• Outlook: Management believes cash flow from operations and available credit facilities will provide adequate liquidity for the next fiscal year. The company continues to focus on acquiring royalties in areas with significant development potential.
• Accounting Risks: The company uses the full cost method of accounting, making it susceptible to "ceiling test" writedowns if commodity prices decline significantly. No writedown was recorded in fiscal 2007, but a $261,617 impairment of a long-term asset (Russian project) occurred in fiscal 2006.
• Operational Risks: The company faces significant risks related to the volatility of oil and gas prices, which directly impact revenue and borrowing capacity. Additionally, the company has limited insurance coverage for all operating hazards.
• Unusual Items: In fiscal 2007, the company purchased a wellbore in New Mexico for $25,000 and spent an additional $325,000; however, it was determined to be noncommercial and will be plugged and abandoned in fiscal 2008. The company also ceased pursuing exploration in North Dakota due to lack of success.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify the impact of current natural gas prices on the company's revenue, as gas constitutes approximately 66% of revenues and 84% of reserves.
• Debt Covenants: Review the revolving credit facility terms with Bank of America, specifically the borrowing base redetermination schedule and restrictions on dividends or asset transfers.
• Reserve Estimates: Confirm the accuracy of proved reserve estimates, particularly the 248,000 Mcfe upward revisions and the 51% of discounted future net cash flows attributed to the El Cinco Gas Field.
• Non-Commercial Wells: Monitor the status and salvage value recovery of the noncommercial well in Roosevelt County, New Mexico, expected to be plugged in fiscal 2008.
• Major Shareholder Influence: Acknowledge that Nicholas C. Taylor controls approximately 50% of the voting stock, which may influence corporate governance and strategic decisions.