Mexco Energy Corporation — Form 10-Q Summary
Business and period: Mexco explores, develops and produces oil, natural gas, condensate and natural gas liquids, principally through non-operated interests. This report covers the fiscal third quarter and first nine months ended December 31, 2016; comparisons are with the corresponding 2015 periods unless noted. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2016 |
|---|---|---|
| Total operating revenue | $590,134, up from $544,870 | $1,841,159, down from $1,976,308 |
| Operating loss | $127,366, versus $2,549,990 | $567,889, versus $4,079,749 |
| Net loss | $159,741; $0.08 per share | $691,099; $0.34 per share |
| Operating cash flow | Not separately reported for the quarter | $97,030, versus $365,179 |
At December 31, cash was $60,858, current assets $414,319, and working capital $211,911, compared with $23,150 at March 31, 2016. Long-term debt was $3.07 million, down from $5.58 million. Total assets were $12.93 million versus $16.47 million, and stockholders’ equity was $8.70 million versus $9.34 million.
Operating cash flow and drilling refunds were supplemented by $2.98 million of asset-sale proceeds. Mexco spent $517,454 on oil and gas properties, paid $93,630 to settle asset retirement obligations, and repaid $2.51 million of debt; cash increased by $26,845 over the nine-month period. No operating margin percentage is expressly presented in the filing.
Changes versus prior year
- Third-quarter oil and gas revenue rose 8% to $580,419: higher average prices more than offset lower volumes. Oil volume fell 4.9% and gas volume 17.8%; average oil and gas prices increased 16.5% and 25.8%, respectively.
- Nine-month oil and gas revenue declined 15% to $1.66 million as oil and gas volumes fell; oil’s average price also declined, while the average gas price was unchanged. Other revenue increased to $178,174, primarily reflecting a royalty-underpayment settlement.
- Net losses improved substantially in both periods, chiefly because the prior-year periods included property impairments of $2.15 million for the quarter and $2.98 million for nine months. No impairment was recorded in the 2016 periods.
- Production, depreciation/depletion/amortization, and general and administrative expenses were lower year over year. The company attributed lower production costs partly to reduced service costs and the sale of operated Pecos County properties.
Outlook, risks and notable items
- Liquidity and credit facility: The $3.07 million outstanding Bank of America facility had no availability at December 31, 2016. It matures November 30, 2020, bears interest at daily floating LIBOR plus 3 percentage points (3.76% at quarter-end), and is secured by substantially all oil and gas properties and subsidiary stock. The company reported covenant compliance at December 31. On January 30, 2017, the borrowing base was reset to $3.12 million. The agreement prohibits cash dividends.
- Commodity and reserve exposure: Management says depressed and volatile oil and gas prices constrain cash for capital spending and debt service; it may sell non-core assets to meet obligations. Price declines can also reduce reserves and the borrowing base or trigger a full-cost impairment. Management reports greater sensitivity to gas prices: a $1/Mcf change in the nine-month average gas price would change pretax results by $266,606; a $10/barrel oil-price change would change them by $264,340.
- Operations and development: Mexco participated in ten Delaware Basin horizontal wells, with costs to date of $494,450. Reported initial test rates for certain wells were strong, but the filing cautions they do not indicate sustained production or results from other wells; additional costs may be incurred.
- Asset sales and subsequent events: Sales of non-core interests supported debt reduction, including the October 2016 sale of working interests for approximately $2.187 million and the November sale of Pecos County properties for $405,000. In February 2017, Mexco sold North Dakota interests for approximately $42,000 and applied proceeds to debt.
- Tax and contingencies: The company reported a $1,094,421 deferred tax asset fully offset by a valuation allowance, citing its view that realization is more likely than not not to occur. It reported no known material legal proceedings and no material changes to previously disclosed risk factors.
- Guidance: The filing provides no specific earnings, production or capital-spending guidance. Management’s forward-looking statements are subject to commodity-price, reserve, financing and operating uncertainties.
Important facts for investors to verify
- Whether cash generation and working capital can support planned drilling and ongoing obligations, given the limited cash balance and lower operating cash flow.
- The effects of the January 2017 borrowing-base determination, future redeterminations, covenant tests and floating interest rates on liquidity and debt capacity.
- Production trends, well uptime and realized commodity prices, particularly natural-gas exposure, and whether reported well test rates translate into sustained production.
- Proceeds and debt application from asset dispositions, including subsequent sales, and the effect of asset sales on future production and reserves.
- Future reserve estimates, full-cost ceiling-test exposure and whether the deferred tax valuation allowance or other estimates change.