Mexco Energy Corporation — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended December 31, 2017; balance sheet compared with March 31, 2017. Mexco explores, develops and produces oil, gas, condensate and NGLs, primarily in West Texas, with interests in 13 states. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Total operating revenue | $654,931 | $590,134 | $1,941,703 | $1,841,159 |
| Operating loss | $(75,902) | $(127,366) | $(506,685) | $(567,889) |
| Net loss | $(101,228) | $(159,741) | $(585,950) | $(691,099) |
| Loss per share, basic and diluted | $(0.05) | $(0.08) | $(0.29) | $(0.34) |
- Oil and gas revenue rose 11% in the quarter and 14% for nine months, mainly because higher realized prices offset lower production. In the quarter, oil volume fell 3.4% and gas volume fell 13.1%; average prices increased 19.7% for oil and 16.2% for gas.
- Nine-month production costs increased 13% to $813,570, while depreciation, depletion and amortization declined 4% to $844,566. General and administrative expense decreased 2% to $765,056; interest expense fell 36% to $79,310.
- Nine-month operating cash flow was $153,136, versus $3,400 a year earlier. Investing activities provided $1,820,695, largely from property-sale proceeds of $2,548,135, offset in part by $802,184 of oil-and-gas-property additions. Financing used $1,950,000 for debt reduction. Cash increased $23,831 to $97,282.
- At December 31, current assets were $746,466 and current liabilities $212,429, yielding reported working capital of $534,037. Total assets were $10,227,936 and stockholders’ equity $8,133,637.
- Long-term debt declined to $950,000 from $2,900,000 at March 31. The company had no unused availability under the credit line at December 31; the borrowing base was reset to $950,000 in January 2018. Debt was $900,000 at February 12, 2018. The facility matures November 30, 2020 and bears floating BBA LIBOR plus 3 percentage points (4.56% at December 31).
Material changes, outlook and risks
- Mexco received approximately $1.9 million from a December sale of marginal-producing interests in Ward and Midland Counties, Texas; approximately $1.518 million was applied to bank debt, with the balance for working capital. Approximately $200,000 remained in escrow for closing costs and title matters. Separate Oklahoma acreage sales generated $460,461 during the first nine months, and a further $46,000 sale closed in January 2018.
- Management expected to participate in approximately 30 horizontal wells during FY2018 at an estimated aggregate cost of $1.2 million. By December 31, approximately $700,000 had been spent on 17 wells; several had begun production or been completed, while 11 were in various completion stages. Management said funding for projects would rely, to the extent possible, on cash, operating cash flow and non-core property sales.
- Management cited depressed and volatile commodity prices and said it may continue to sell non-core assets to meet obligations. Lower prices could reduce cash flow, reserves and the credit-facility borrowing base, and could trigger a full-cost property write-down. Mexco disclosed no fixed-quantity oil or gas delivery commitments.
- The credit agreement requires trailing-four-quarter EBITDA of at least $650,000 and quarterly interest coverage of at least 2.00:1. Mexco reported covenant compliance at December 31 and expected continued compliance for the next fiscal year. The agreement prohibits cash dividends and requires net proceeds from property dispositions to reduce the borrowing base and debt, absent bank approval.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%; Mexco remeasured deferred taxes, reducing the deferred tax asset and related valuation amount by $509,863. The $822,425 deferred tax asset was fully offset by a valuation allowance, and the company stated it was more likely than not the asset would not be realized.
- Other notable exposures include a floating-rate loan, commodity-price sensitivity, and escrow credit risk: $200,000 of escrow represented 32% of total receivables. Management reported effective disclosure controls, no material changes in internal control, and no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the property-sale escrow is released and whether any title or closing-cost issues affect proceeds.
- Actual well completion, production and capital costs versus the stated FY2018 plan, and the resulting effect of lower production from asset sales and shut-ins.
- Future borrowing-base determinations, debt repayment capacity, covenant compliance and the absence of credit-line availability at December 31.
- Commodity-price and reserve assumptions, including any full-cost ceiling-test impairment risk.
- Whether the deferred tax asset valuation allowance remains appropriate as future taxable-income expectations change.