Mexco Energy Corporation — Form 10-Q Summary
Business and period: Mexco explores, develops, and produces oil, natural gas, condensate, and NGLs, primarily through non-operated interests, with most interests in the Permian Basin. This unaudited report covers the three and nine months ended December 31, 2018, the third quarter and first nine months of fiscal 2019. Unless otherwise noted, amounts are dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2018 |
|---|---|---|
| Operating revenue | $644,316 | $2,107,835 |
| Operating income (loss) | $(8,129) | $41,606 |
| Net income (loss) | $(13,076) | $23,375 |
| Net income (loss) per share | $(0.01) | $0.01 |
| Operating cash flow | Not presented separately | $820,501 |
- Nine-month operating revenue increased 9% year over year; oil and gas sales were $2,076,742. Oil revenue rose 22.4%, reflecting higher average prices and modestly higher volumes; gas revenue fell 15.8% as both price and volumes declined.
- Quarterly operating revenue declined 1.6% year over year. Oil sales increased 4.1%, but lower gas sales offset the gain. The quarter’s operating loss was $8,129, versus a $75,902 loss a year earlier; net loss narrowed from $101,228.
- Nine-month results improved from a $585,950 net loss in 2017 to $23,375 net income. Lower operating expenses and higher revenue contributed. Operating margin was approximately 2.0% for the nine months and negative 1.3% for the quarter.
- Nine-month production expense was $721,301, down 11%; depreciation, depletion and amortization was $617,864, down 27%; G&A was $710,194, down 7%; and interest expense was $18,318, down 77%.
- Operating cash flow increased from $153,136 in the prior-year nine-month period. Investing activities used $520,807, principally for oil and gas property additions of $632,033, partly offset by $111,226 of property sale proceeds. Financing activities used $686,759, including $700,000 of debt repayment. Cash decreased $387,065 to $105,545.
- At December 31, 2018, total assets were $9.44 million, current assets $512,575, current liabilities $115,942, and working capital $396,633. Working capital was down $528,985 from March 31, 2018. Long-term debt was zero; asset retirement obligations were $876,420, including a $10,000 current portion. Stockholders’ equity was $8.46 million.
Changes, outlook, and risks
- On December 28, 2018, Mexco replaced its Bank of America facility with a $1.0 million West Texas National Bank credit facility, maturing December 28, 2021. No amount was drawn at quarter-end. The company had repaid the prior facility’s remaining $450,000 balance using company funds. The new facility bears interest at prime plus 0.5%, is secured by subsidiary stock and substantially all oil and gas properties, and includes financial covenants. Mexco reported covenant compliance at quarter-end and expected to remain compliant during the next fiscal year.
- The new agreement prohibits cash dividends without lender consent and does not permit oil and gas price hedging. Mexco said depressed commodity prices drive financial discipline and that it may continue selling non-core assets to meet obligations.
- For fiscal 2019, Mexco expected to participate in approximately 50 horizontal wells at an estimated aggregate cost of $1.3 million. It had participated in 41 wells costing approximately $715,000 during the first nine months; 13 were producing and 28 were being drilled or completed. Remaining project costs may be funded from cash, operating cash flow, credit-facility borrowings, or asset sales.
- Management described oil and gas prices as volatile and cited Permian Basin pipeline-capacity constraints as an adverse influence. A $10-per-barrel change in average oil price would have changed nine-month pretax results by $270,900; a $1-per-Mcf gas-price change would have changed them by $219,204. The company warned that lower prices could impair liquidity, reserves, borrowing capacity, and property carrying values.
- One purchaser represented 42% of oil and gas receivables, or $145,296; receivables are generally unsecured. Management reported no significant credit losses. A $1,248,620 deferred tax asset was fully offset by a valuation allowance because management believed realization was more likely than not not to occur.
- Other disclosed items include $118,718 of remaining lease payments in the contractual-obligations table and a $25,000 letter of credit supported by a $26,250 cash collateral deposit. Management said disclosure controls were effective and reported no material changes in internal control. No material risk-factor changes or material legal proceedings were reported.
Important facts for investors to verify
- Whether the undrawn $1.0 million credit facility and its covenants provide adequate liquidity for planned drilling and other obligations, particularly given cash of $105,545 and lower working capital.
- Actual well completion, production, and capital costs versus the approximately 50-well, $1.3 million fiscal-year plan.
- Oil and gas price, pipeline takeaway, and purchaser concentration exposure, and any resulting effects on cash flows, reserves, or borrowing capacity.
- The condition and expected collectability of receivables and the assumptions supporting the full valuation allowance against deferred tax assets.