Mexco Energy Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018, compared with fiscal 2017. Although the request identifies 2017 Q4, this filing reports FY2018; it also reports net income of $264,461 for the quarter ended March 31, 2018.
Business context
Mexco is a small independent oil and gas producer, with most activity in the Permian Basin and interests in properties across 13 states. It holds interests in approximately 6,000 producing wells, mostly operated by others. Oil represented about 57% of proved reserves and 68% of FY2018 revenue; royalty interests provided about 21% of revenue.
Financial and operating results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total operating revenue | $2.705 million | $2.525 million |
| Oil and gas revenue | $2.650 million | $2.337 million |
| Operating loss | $232,238 | $542,652 |
| Net loss | $321,489 | $694,553 |
| Net loss per share | $0.16 | $0.34 |
| Cash from operations | $441,024 | $207,712 |
| Cash and cash equivalents, year-end | $492,610 | $73,451 |
| Working capital, year-end | $925,618 | $367,675 |
| Long-term debt, year-end | $700,000 | $2.900 million |
- Oil production was 34,743 barrels, essentially unchanged; realized oil price rose 17.7% to $51.51/bbl. Gas production fell 10.5% to 318,774 Mcf, while realized gas price rose 17.4% to $2.70/Mcf.
- Production costs increased 22% to $1.070 million. Lifting cost rose to $9.91/BOE from $7.63; production cost per sales dollar increased to $0.33 from $0.31.
- DD&A declined 25% to $880,419; G&A declined 2% to $955,147; interest expense declined 41% to $89,537. No income tax expense was recorded in either year.
- Investing cash flow was $2.178 million, including $3.162 million of property-sale proceeds and $1.093 million of property additions. Mexco used $2.2 million to repay debt, producing a $419,159 net increase in cash.
- Year-end total assets were $10.401 million and total liabilities were $1.999 million. The $700,000 credit-facility balance equaled the borrowing base, leaving no borrowing availability at March 31, 2018.
Material changes and reserves
- Net loss narrowed by approximately 54%, while oil and gas revenue rose 13%, principally from higher commodity prices. Lower other operating revenue reflected a prior-year $148,614 royalty-settlement receipt.
- Proved reserves fell to 2.111 million BOE from 3.238 million BOE. The filing attributes the principal downward revision—about 1.003 million BOE—to restructuring development plans for a non-producing Martin County, Texas leasehold, partly offset by pricing and development in the Delaware and Midland Basins. Property sales also reduced reserves.
- PV-10 declined to $22.002 million from $25.266 million; the after-tax standardized measure was $18.876 million versus $19.083 million. These reserve valuations use prescribed assumptions and are not estimates of fair market value.
- Proved undeveloped reserves were 1.037 million BOE, or 49% of proved reserves, down from 2.153 million BOE at the beginning of the year. Mexco converted approximately 70,500 BOE to producing reserves through development and reported $12.009 million of estimated future development costs for ending PUDs.
- Mexco sold non-core acreage and working interests during the year, applying substantial proceeds to debt reduction. It reported no ceiling-test impairment in FY2018 or FY2017.
Outlook, risks and unusual items
- For FY2019, management plans to improve cash flow through operating efficiencies and cost reductions, divest non-core assets, and match capital spending to cash flow to limit borrowing and preserve liquidity. Management believed operating cash flow and property and common-stock sales would provide adequate liquidity for the next fiscal year; no quantified earnings or production guidance was provided.
- The credit facility matures November 30, 2020, bears a floating rate of LIBOR plus 3 percentage points (4.875% at year-end), and is secured by substantially all oil and gas properties. The lender may reset the borrowing base. The agreement requires minimum trailing-four-quarter EBITDA of $650,000 and a quarterly interest-coverage ratio of 2.00:1; Mexco reported compliance at year-end and expected continued compliance.
- Key exposures include volatile oil and gas prices, reserve-estimate uncertainty, development and financing needs, regional price differentials, reliance on third-party operators and pipelines, environmental and plugging liabilities, and significant customer concentration. One customer accounted for 37% of oil and gas revenue in FY2018. A 5% oil-price change was estimated to change annual revenue by $173,715; a $1/Mcf gas-price change by $318,774.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate; remeasurement reduced deferred tax assets and the valuation allowance by $466,020. Mexco maintained a full valuation allowance against its $1.235 million net deferred tax asset.
- Management reported effective internal and disclosure controls. The independent auditor issued an unqualified opinion on the financial statements, but was not engaged to audit internal controls. No material environmental remediation expenditures or known claims requiring material FY2019 capital expenditures were reported.
Important facts for investors to verify
- Whether the Martin County reserve revision and planned PUD drilling schedules change further, including the timing and funding of the estimated $12.009 million development program.
- Current borrowing-base availability, covenant headroom, debt repayments, and the effect of any further asset sales or reserve revisions.
- Whether production-cost increases, customer concentration, and commodity-price differentials affect operating cash flow and liquidity.
- How FY2019 operating results and deferred-tax realizability compare with management’s expectations; the filing provides no quantified FY2019 guidance.