Business Context and Reporting Period
Company: Mexco Energy Corporation (MEXCO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Mexco is engaged in the exploration, development, and production of natural gas, crude oil, condensate, and natural gas liquids (NGLs). While most interests are centered in West Texas, the Company owns properties in ten states. The Company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 |
Six Months Ended Sep 30, 2009 |
Six Months Ended Sep 30, 2008 |
|---|---|---|---|
| Total Operating Revenue | $746,294 | $1,404,471 | $3,281,127 |
| Net Income | $158,350 | $90,347 | $1,049,904 |
| Earnings Per Share (Basic) | $0.08 | $0.05 | $0.58 |
| Cash Flow from Operations | N/A | $451,861 | $1,621,064 |
| Cash and Equivalents (Sep 30, 2009) | $229,057 | ||
| Long-Term Debt | $1,275,000 | ||
| Working Capital | $372,809 |
Material Changes vs. Prior Period
- Revenue Decline: Oil and gas sales revenue decreased 54% for the quarter and 57% for the six-month period compared to the prior year. This was driven primarily by significant drops in commodity prices (average gas price fell from $8.78 to $3.08 per mcf; average oil price fell from $116.07 to $64.40 per bbl).
- Production Volume: Despite price declines, gas production increased by 22% (quarter) and 18% (six months), while oil production remained relatively flat or decreased slightly.
- Profitability: Net income dropped significantly year-over-year ($158k vs $511k for the quarter; $90k vs $1.05M for six months). However, the Company reported a deferred income tax benefit of $171,163 (quarter) and $198,789 (six months) due to a change in statutory depletion carryforward, which improved net income figures.
- Expense Management: Production costs decreased by 25% (quarter) and 26% (six months) due to lower production taxes and lease operating expenses. Interest expense also dropped 56% and 66% respectively due to reduced borrowings.
- Debt Reduction: Long-term debt decreased from $1,400,000 at March 31, 2009, to $1,275,000 at September 30, 2009.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes cash flow from operations and available financing will provide adequate liquidity for the next fiscal year. The Company has a $5.0 million revolving credit facility with $3.625 million available as of September 30, 2009.
- Market Risk: The Company is highly sensitive to natural gas prices as most production and reserves are gas-based. A $1.00 per mcf change in gas price would impact net income by approximately $286,271 for the six-month period. The Company has no hedging arrangements in place.
- Capital Strategy: The Company is focusing on acquiring royalties in areas with development potential (e.g., Newark East Field) and developing gas properties with low-cost operations. Capital expenditures for the six months were $451,485 for oil and gas properties.
- Contingencies: The Company has a statutory depletion carryforward of approximately $3.2 million and a net operating loss carryforward of $1.87 million. There are no material legal proceedings pending.
Investor Verification Checklist
- Commodity Price Sensitivity: Verify current WTI and Henry Hub prices against the Company's break-even points, given the lack of hedging.
- Debt Covenants: Confirm continued compliance with the Bank of America credit facility covenants, specifically regarding the borrowing base which is evaluated annually.
- Reserve Estimates: Review the impact of the new SEC "Modernization of Oil and Gas Reporting" rules (effective Dec 31, 2009) on future reserve disclosures.
- Tax Attributes: Validate the utilization of the $3.2 million statutory depletion carryforward and $1.87 million NOL carryforward in future tax filings.
- Related Party Transactions: Review the ongoing financial arrangements with board member Thomas Craddick and consultant Jeff Smith regarding working interests and overriding royalties.