Mexco Energy Corporation — Form 10-Q Summary
Business context and reporting period. Mexco explores, develops, and produces oil, natural gas, condensate, and NGLs, principally in West Texas and southeastern New Mexico. Its interests are operated by others. This unaudited report covers the three months ended June 30, 2021, Mexco’s fiscal first quarter of 2022, and compares results with the three months ended June 30, 2020.
Financial performance
| Metric | Quarter ended June 30, 2021 | Prior-year quarter |
|---|---|---|
| Operating revenue | $1.264 million | $370,456 |
| Oil and gas sales | $1.256 million | $364,179 |
| Operating income (loss) | $407,666 | ($281,380) |
| Net income (loss) | $395,006; $0.19 per diluted share | ($299,670); ($0.15) per diluted share |
| Operating cash flow | $666,054 | $66,472 |
| Investing cash flow | ($297,113) | ($251,890) |
| Financing cash flow | ($346,000) | $203,574 |
Revenue increased 241% overall; oil and gas sales increased 245%. Oil sales rose 250%, reflecting a 161% increase in realized price to $63.94 per barrel and a 34% increase in volume. Natural gas sales rose 228%, reflecting a 189% increase in realized price to $2.98 per mcf and a 13% increase in volume. Operating margin was approximately 32% versus a negative 76% a year earlier; net margin was approximately 31% versus a negative 81%.
Production expense increased 61% to $276,987; DD&A increased 18% to $264,320; G&A increased 24% to $308,167; and interest expense increased 15% to $12,719. The filing attributes the improvement in earnings mainly to higher oil and gas prices and production. The prior-year quarter included shut-in wells and operator cost reductions during the pandemic.
Cash and cash equivalents were $80,754 at June 30, 2021, up $22,941 from March 31. Working capital was $626,850, compared with $618,960 at March 31. Gross credit-facility borrowings were $800,000 at quarter-end ($778,080 net of unamortized issuance costs), down from $1.18 million at March 31; $700,000 was available under the facility. In July, Mexco paid down another $250,000, leaving $550,000 outstanding as of the report date. The facility matures March 28, 2023, bears interest at prime plus 0.5%, and is secured by substantially all oil and gas properties and subsidiary stock. No income tax expense was recorded; the company maintains a full valuation allowance against its $1.18 million deferred tax asset.
Material changes, outlook, and risks
- Oil and gas property additions were $302,976 in the quarter. Mexco planned to participate in 36 Delaware Basin horizontal wells during fiscal 2022, at an estimated aggregate cost of approximately $1.25 million. Funding may come from cash flow, credit-facility borrowings, and possible sales of non-core properties.
- The company reported no derivative contracts at June 30, 2021. It stated that the credit agreement requires lender approval for hedging and prohibits cash dividends without written permission.
- Commodity prices remain the principal market risk; Mexco warned that price declines could impair earnings, liquidity, reserves, borrowing capacity, and possibly require a noncash full-cost ceiling write-down. One purchaser represented 74% of oil and gas receivables ($495,512). Floating-rate debt also creates interest-rate exposure.
- Management cited financial discipline and a strategy focused on increasing margins and acquiring or developing low-cost, long-lived reserves. The filing gives no formal earnings or production guidance. Results for the quarter are not necessarily indicative of full-year results.
- Subsequent events included July debt repayment and option exercises, and a grant of options for 31,000 shares at an $8.51 exercise price. The office lease was extended through July 31, 2024. Management reported effective disclosure controls and no material change in internal control; it reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether production, realized commodity prices, and cash generation sustain the sharp year-over-year earnings recovery.
- Actual spending and well results relative to the planned $1.25 million fiscal-2022 participation program.
- Credit-facility covenant compliance, available borrowing capacity, and repayment progress; the facility requires trailing-four-quarter senior debt/EBITDA of no more than 4.00:1 and quarterly EBITDA/interest expense of at least 2.00:1.
- Exposure to commodity-price volatility and the concentration of receivables with the largest purchaser.
- Whether future taxable income supports realization of deferred tax assets, which are fully reserved at the reporting date.