Business context and reporting period
Mexco Energy Corporation explores, develops and produces oil, natural gas, condensate and natural gas liquids, with most interests in West Texas and properties in 13 states. This Form 10-Q covers the quarter and six months ended September 30, 2014 (fiscal Q2 and first half of fiscal 2015); results are unaudited.
Financial performance
| Metric | Three months ended Sep. 30, 2014 | Three months ended Sep. 30, 2013 | Six months ended Sep. 30, 2014 | Six months ended Sep. 30, 2013 |
|---|---|---|---|---|
| Total operating revenue | $1.006 million | $1.121 million | $2.024 million | $2.118 million |
| Operating profit | $60,128 | $212,368 | $111,198 | $282,837 |
| Net income | $86,256 | $194,051 | $105,310 | $210,182 |
| Diluted EPS | $0.04 | $0.10 | $0.05 | $0.10 |
| Cash from operations | Not presented quarterly | $708,341 | $857,107 |
Quarterly operating margin was approximately 6.0%, versus 18.9% a year earlier; first-half operating margin was approximately 5.5%, versus 13.4%. Oil and gas revenue declined 11% for the quarter and 5% for the six months. Quarterly oil sales revenue fell 15.7%, primarily as average oil price declined 18.1% to $85.16/bbl; gas volume fell 6.7%, while average gas price rose 7.4% to $3.77/mcf. For the first half, average oil price fell 9.4% to $88.99/bbl and gas volume fell 7.3%; gas price increased 10.4% to $4.03/mcf.
At September 30, cash was $154,986, working capital was $530,457, and current assets and liabilities were $873,723 and $343,266, respectively. Long-term debt was $2.6 million, up from $2.425 million at March 31; the $6.3 million revolving facility had $3.544 million available at quarter-end. The credit line matures November 30, 2016, bears floating interest (2.65% at quarter-end), and the company was in covenant compliance. Management reported no anticipated principal payments through maturity. Six-month investing cash outflow was $884,437, including $826,473 of oil and gas property additions; financing provided net cash of $175,000. Cash declined $1,096 to $154,986.
Material changes and management commentary
- Net income fell 56% in the quarter and 50% in the first half year over year. Management attributed the decline mainly to lower operating revenue and higher production and depreciation, depletion and amortization costs. First-half G&A also increased 7%, while interest expense declined.
- Derivative results swung to gains: $51,380 for the quarter and $17,751 for the first half, compared with losses of $59,295 and $86,687 in the prior-year periods. First-half 2014 derivative gain included $47,991 unrealized gain and $30,240 realized loss; derivatives are not designated as accounting hedges, so fair-value changes affect earnings.
- In October, Mexco acquired royalty interests for $1.0 million and non-operated working interests for $525,000; both purchases were funded with bank borrowings. The filing reports the line-of-credit balance at $4.175 million as of October 31, 2014.
- Management expected to participate in drilling and completion of 41 horizontal and three vertical wells over the next 15 months, with aggregate estimated company expenditure of approximately $1.8 million. Management stated operating cash flow and available financing should provide adequate liquidity for the next fiscal year. No specific earnings or revenue guidance was provided.
- Management cited volatile oil and gas prices as the principal market risk. A 1 percentage-point interest-rate change would alter annual pretax income by approximately $26,000 at quarter-end debt levels. Falling commodity prices could reduce cash flow, reserves and borrowing capacity, and could trigger a noncash full-cost property write-down. No material change to previously disclosed risk factors was reported.
- The company reported no known material legal or governmental proceedings, no off-balance-sheet debt or guarantees, and effective disclosure controls. The credit agreement prohibits cash dividends. October acquisitions and the planned drilling program increase funding and execution exposure.
Key facts for investors to verify
- How the October acquisitions affect borrowing-base availability, leverage, interest expense and liquidity; the reported $4.175 million debt balance is after quarter-end.
- Whether planned drilling expenditures remain near the $1.8 million estimate and are supported by production and operating cash flow.
- Whether oil and gas prices, realized production volumes and operating costs improve after the reported period; earnings and cash flow are sensitive to commodity prices.
- The sustainability of reported earnings given the material role of unrealized derivative gains and the company’s non-hedge accounting treatment.
- Potential reserve revisions or full-cost ceiling impairment if commodity prices weaken; the filing does not quantify a current impairment exposure.