Mexco Energy Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2018, the second quarter and first half of fiscal 2019. The unaudited consolidated statements cover Mexco Energy and its wholly owned subsidiaries. The company explores, develops and produces oil, natural gas, condensate and NGLs, with most interests in the Permian Basin.
Financial performance
| Metric | Three months ended Sept. 30, 2018 | Six months ended Sept. 30, 2018 |
|---|---|---|
| Oil and gas revenue | $701,246; up 15% year over year | $1,436,599; up 14% |
| Total operating revenue | $714,508 | $1,463,519 |
| Operating income (loss) | $28,407, versus $(162,438) | $49,735, versus $(430,783) |
| Net income (loss) | $22,031, versus $(189,170) | $36,451, versus $(484,722) |
| Basic and diluted EPS | $0.01, versus $(0.09) | $0.02, versus $(0.24) |
| Operating cash flow | Not separately presented | $498,537, versus $326,435 |
| Capital additions to oil and gas properties | Not separately presented | $438,621 |
Operating expenses totaled $686,101 for the quarter and $1,413,784 for the six months. The filing does not report a gross-margin measure. No income tax expense was recorded. The company reported a $1,241,320 deferred tax asset fully offset by a valuation allowance, reflecting management’s view that realization is more likely than not not to occur.
Liquidity, debt and balance sheet
- At September 30, cash was $348,860, current assets $905,778 and current liabilities $126,049; working capital was $779,729, down $145,889 from March 31, 2018.
- Long-term bank debt was $450,000, down $250,000 during the six-month period. Total liabilities were $1,433,310 and stockholders’ equity was $8,462,726.
- The Bank of America facility had a $525,000 borrowing base and $50,000 availability at September 30; the balance was $375,000 and availability $125,000 as of November 8, 2018. The facility matures November 30, 2020, carries a floating rate of LIBOR plus 3 percentage points (5.22% at September 30), and is secured by oil and gas properties and subsidiary stock.
- The company said it was in compliance with the facility’s financial covenants at quarter-end and expected to remain compliant for the current fiscal year. The facility prohibits cash dividends.
- Cash decreased by $143,750 during the six months, ending at $348,860. Cash flow from operations was partly offset by property investment and debt repayment.
Material changes and management commentary
- Quarterly oil and gas revenue growth reflected higher oil prices and oil production, partly offset by lower gas production. Oil revenue increased 29.6%; gas revenue declined 9.8%.
- For the six-month period, higher oil prices drove oil revenue up 32.3%, while lower gas prices and volumes contributed to an 18.7% decline in gas revenue. Overall oil and gas production declined, according to management.
- Production costs declined 10% year over year for the half-year, partly because the prior-year period included an approximately $67,000 marketing and transportation fee refund from XTO. DD&A fell 29%, G&A fell 12%, and interest expense fell 75% for the half-year.
- Management expects to participate in approximately 50 horizontal wells during fiscal 2019 at an estimated aggregate cost of approximately $1.3 million. In the first half, Mexco participated in 32 wells at aggregate costs of approximately $540,000. The first five completed wells had reported initial average production of 1,896 barrels of oil equivalent per day; Mexco’s working interest was approximately 0.6%.
- Management said it may continue selling non-core assets to meet obligations and fund projects. It reported approximately $33,000 of proceeds from a sale of North Dakota and Montana acreage and marginal producing interests during the first half.
Risks, contingencies and other notable items
- Commodity prices are the principal market risk. Management cited temporary Permian Basin pipeline capacity constraints and warned that lower oil and gas prices could reduce cash flow, reserves, borrowing capacity and liquidity, and could trigger a full-cost accounting impairment.
- At September 30, one purchaser represented 39% ($156,465) of oil and gas receivables. Receivables are generally unsecured; the company reported no significant credit losses.
- The company had $867,261 of total asset retirement obligations, including a $10,000 current portion.
- No material changes to previously disclosed risk factors were reported. The filing states that the company was not aware of pending or contemplated legal or governmental proceedings of the specified type. Disclosure controls were assessed as effective, with no material changes in internal control reported.
- Management cautioned that interim results are not necessarily indicative of full-year results. Forward-looking statements are subject to uncertainty, and the company undertook no obligation to update them.
Important facts for investors to verify
- Whether actual well participation and spending track the approximately 50-well, $1.3 million fiscal-year plan.
- Current borrowing-base terms, remaining facility availability, and ongoing compliance with EBITDA and interest-coverage covenants.
- Oil and gas price realizations, production trends, and the duration and impact of Permian pipeline constraints.
- Whether future taxable income supports any realization of deferred tax assets; the current $1.24 million asset is fully reserved.
- Reserve estimates, asset retirement obligations, and any potential full-cost impairment if commodity prices weaken.