Mexco Energy Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended March 31, 2015. Although the request references 2014 Q4, this filing covers FY2015; it also reports quarterly results, including the fiscal fourth quarter ended March 31, 2015. Mexco is a small independent U.S. oil and gas company, with most activity in West Texas and much of its acreage operated by third parties.
Financial and operating performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total operating revenue | $3.390 million | $4.042 million |
| Oil and gas sales | $3.337 million | $3.994 million |
| Operating income (loss) | ($541,359) | $477,340 |
| Net income (loss) | ($340,986) | $301,113 |
| Basic and diluted EPS | ($0.17) | $0.15 |
| Cash from operations | $1.177 million | $1.813 million |
| Capital investment in oil and gas properties | $4.778 million | $2.150 million |
| Cash and cash equivalents at year-end | $96,084 | $156,082 |
| Long-term debt at year-end | $5.950 million | $2.425 million |
| Working capital at year-end | $166,650 | $522,216 |
Operating margin was approximately negative 16% in FY2015, versus approximately positive 12% in FY2014. Production expense was $1.301 million, DD&A was $1.363 million, and G&A was $1.240 million. Interest expense rose to $99,240 from $65,387. An income tax benefit of $197,499 partly offset the pretax loss. Cash flow after reported investing outflows was negative approximately $3.580 million; financing provided $3.520 million. The company reported no ceiling-test impairment for FY2015.
Oil production increased 8.7% to 29,557 barrels, while average realized oil price fell 26.5% to $70.03 per barrel before derivative effects. Gas production increased 2.0% to 369,034 Mcf, while average price declined 11.6% to $3.43 per Mcf. Oil and gas production costs per equivalent Mcf rose to $1.87 from $1.80.
Material changes and reserves
- Oil and gas sales declined 16%, as lower commodity prices outweighed production growth. The company moved from FY2014 net income to a FY2015 net loss; the fourth quarter alone recorded a $270,975 net loss on $551,894 of oil and gas revenue.
- Mexco acquired royalty and working interests for a combined $3.145 million during FY2015, and reported approximately $1.75 million of drilling and development expenditures. The acquisitions added scale but increased borrowing needs.
- Year-end proved reserves were 10.247 million Mcfe, up from 9.269 million Mcfe. Additions from extensions and discoveries and acquisitions were partly offset by downward revisions. Management attributed revisions primarily to SEC rules requiring PUDs to be developed within five years and to one unsuccessful well.
- PV-10 declined to $23.700 million from $24.745 million; the standardized measure of discounted future net cash flows declined to $18.938 million from $19.329 million. SEC reserve pricing used an average $74.84 per barrel of oil, down 21%, and $3.60 per Mcf of gas, down 2%.
Liquidity, outlook, and risks
The $6.3 million revolving facility with Bank of America had $5.950 million outstanding at year-end, leaving $300,000 of stated availability. It is secured by substantially all oil and gas properties, bears floating interest at LIBOR plus 2.5 percentage points (2.68% at year-end), and matures November 30, 2020. Mexco reported covenant compliance at March 31, 2015; the balance had risen to $6.1 million by June 23, 2015. The agreement restricts cash dividends.
Management expected cash from operations and financing to provide adequate liquidity for the next fiscal year. For FY2016, it expected to participate in 19 horizontal wells and one disposal well at an aggregate estimated cost of approximately $954,000, with 23% paid by the filing date; approximately 74% of planned spending was in Lea County, New Mexico. The company also scheduled development of proved undeveloped reserves over several years. This is a spending plan, not earnings or production guidance.
- Commodity exposure: Falling prices can reduce revenue, reserves, borrowing capacity, and liquidity, and can trigger noncash full-cost write-downs. Mexco said its results were more sensitive to natural gas prices because gas comprised most reserves. No oil swaps remained open at March 31, 2015; FY2015 derivative gains were $102,069.
- Development and reserve risk: About 39% of proved reserves were undeveloped. Development depends on capital availability, drilling outcomes, timing, operators, and economic assumptions; reserves and PV-10 are estimates, not market values.
- Debt and concentration: The facility was nearly fully drawn, with borrowing availability dependent on lender review and reserve values. One customer represented 17% of FY2015 oil and gas revenue. Chairman and CEO Nicholas Taylor beneficially owned approximately 44% of shares, creating significant shareholder influence and key-person exposure.
- Other exposures: The filing discusses operating hazards, reliance on third-party operators and transport infrastructure, environmental and hydraulic-fracturing regulation, and possible costs or liabilities from plugging and remediation. Mexco said it was in material compliance with applicable environmental requirements and was unaware of environmental matters requiring material FY2016 capital expenditures.
Most important facts for investors to verify
- Subsequent debt balances, borrowing-base availability, and compliance with credit-facility covenants.
- Actual FY2016 well spending, drilling results, production, and conversion of PUD reserves within the required development timetable.
- Whether lower commodity prices or further reserve revisions affect cash flow, reserve values, or full-cost ceiling-test capacity.
- Whether acquisition economics and operating costs support a return on the substantial FY2015 property investment.
- Quarterly financial statements and the notes to the audited statements for cash-flow detail, reserve assumptions, and asset-retirement obligations; the independent auditor issued an unqualified opinion on the financial statements.