Unless the context otherwise requires, references to the "Company", "Mexco",
"we", "us" or "our" mean Mexco Energy Corporation and its consolidated
Cautionary Statements Regarding Forward-Looking Statements. Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Forward-looking statements include statements regarding our plans, beliefs or
current expectations and may be signified by the words "could", "should",
"expect", "project", "estimate", "believe", "anticipate", "intend", "budget",
"plan", "forecast", "predict" and other similar expressions. Forward-looking
statements appear throughout this Form 10-Q with respect to, among other things:
profitability; planned capital expenditures; estimates of oil and gas
production; future project dates; estimates of future oil and gas prices;
estimates of oil and gas reserves; our future financial condition or results of
operations; and our business strategy and other plans and objectives for future
operations. Forward-looking statements involve known and unknown risks and
uncertainties that could cause actual results to differ materially from those
contained in any forward-looking statement.
While we have made assumptions that we believe are reasonable, the assumptions
that support our forward-looking statements are based upon information that is
currently available and is subject to change. All forward-looking statements in
the Form 10-Q are qualified in their entirety by the cautionary statement
contained in this section. We do not undertake to update, revise or correct any
of the forward-looking information. It is suggested that these financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Form 10-K.
Liquidity and Capital Resources. Historically, we have funded our operations,
acquisitions, exploration and development expenditures from cash generated by
operating activities, bank borrowings, sales of non-core properties and issuance
of common stock. Our primary financial resource is our base of oil and gas
reserves. We have pledged our producing oil and gas properties to secure our
revolving line of credit. We do not have any delivery commitments to provide a
fixed and determinable quantity of our oil and gas under any existing contract
Due to the current commodity price environment, we are applying financial
discipline to all aspects of our business. In order to meet obligations, we may
continue to sell non-core assets.
Our long term strategy is on increasing profit margins while concentrating on
obtaining reserves with low cost operations by acquiring and developing oil and
gas properties with potential for long-lived production. We focus our efforts on
the acquisition of royalties and working interests and non-operated properties
in areas with significant development potential.
For the first three months of fiscal 2020, cash flow from operations was
$185,956, an increase when compared to the corresponding period of fiscal 2019
primarily due to the receipt of $30,894 for the final settlement in a lawsuit.
Cash of $225,000 was received from the line of credit and net cash of $313,847
was used for addition to oil and gas properties and cash of $75,000 used for an
investment at cost basis. Accordingly, net cash increased $22,109 leaving cash
and cash equivalents on hand of $150,361 as of June 30, 2019.
At June 30, 2019, we had working capital of $342,348 compared to working capital
of $395,895 at March 31, 2019, a decrease of $53,547 for the reasons set forth
Oil and Natural Gas Property Development. In addition to an indeterminate number
of wells to be drilled by other operators on Mexco's royalty interests, the
Company currently plans to participate in the drilling and completion of
approximately 50 horizontal wells at an estimated aggregate cost of
approximately $1,400,000 for the fiscal year ending March 31, 2020. The
operators of these wells include Concho Resources, Inc., Devon Energy, Marathon
Oil Company, Mewbourne Oil Company, and others.
During the first quarter of fiscal 2020, Mexco participated with various
percentage interests in the drilling and completion of the first 13 of these
horizontal wells in the Delaware Basin located in the western portion of the
Permian Basin in Eddy and Lea Counties, New Mexico with aggregate costs of
approximately $100,000. Subsequently, Mexco expended an additional $191,000 for
the completion of another seven wells.
Also, during the first quarter of fiscal 2020, Mexco expended $186,000 for the
completion of 4 wells in which the Company participated in drilling during
fiscal 2019. These wells tested at an average rate of 1,131 barrels of oil;
2,452 barrels of water; and 2,426,000 cubic feet of gas per day, or 1,535
barrels of oil equivalent per day.
In April 2019, the Company made a less than 1% cost basis investment commitment
in a limited liability company amounting to $250,000 of which $75,000 has been
funded through June 30, 2019. This amount is classified as an investment at cost
basis on the Company's consolidated balance sheets. The limited liability
company is capitalized at approximately $50 million to purchase mineral
interests in the Utica and Marcellus areas in the state of Ohio.
In June 2019, the Company received $30,894 in payment for a promissory note in
connection with the settlement of a lawsuit from September 2016.
We are participating in other projects and are reviewing projects in which we
may participate. The cost of such projects would be funded, to the extent
possible, from existing cash balances and cash flow from operations. The
remainder may be funded through borrowings on the credit facility and, if
appropriate, sales of non-core properties.
Crude oil and natural gas prices generally decreased during the last year. The
volatility of the energy markets makes it extremely difficult to predict future
oil and natural gas price movements with any certainty. For example in the last
twelve months, the NYMEX WTI posted price for crude oil has ranged from a low of
$39.25 per bbl in December 2018 to a high of $73.00 per bbl in October 2018. The
Henry Hub Spot Market Price ("Henry Hub") for natural gas has ranged from a low
of $2.27 per MMBtu in June 2019 to a high of $4.70 per MMBtu in November 2018.
On June 30, 2019 the WTI posted price for crude oil was $55.00 per bbl and the
Henry Hub spot price for natural gas was $2.42 per MMBtu.
Contractual Obligations. We have no off-balance sheet debt or unrecorded
obligations and have not guaranteed the debt of any other party. The following
table summarizes our future payments we are obligated to make based on
agreements in place as of June 30, 2019:
Payments due in:
less than 1
Total year 1 - 3 years over 3 years
Secured bank line of credit (1) $ 225,000 $ - $ 225,000 $ -
(1) These amounts represent the balances outstanding under the bank line of
credit. This repayment assumes that interest will be paid on a monthly
basis, no additional funds will be drawn and does not include estimated
interest of $13,500 less than 1 year and $20,250 1-3 years.
Results of Operations - Three Months Ended June 30, 2019 Compared to Three
Months Ended June 30, 2018. For the quarter ended June 30, 2019, there was a net
loss of $54,186, compared to net income of $14,420 for the quarter ended June
30, 2018. This was a result of a decrease in operating revenues and an increase
in operating expenses that is further explained below.
Oil and gas sales. Revenue from oil and gas sales was $691,694 for the quarter
ended June 30, 2019, a 6% decrease from $735,353 for the quarter ended June 30,
2018. This primarily resulted from a decrease in oil and gas prices and gas
production partially offset by an increase in oil production.
2019 2018 % Difference
Revenue $ 588,436$ 570,063 3.2 %
Volume (bbls) 10,609 9,387 13.0 %
Average Price (per bbl) $ 55.47$ 60.73 (8.7 %)
Revenue $ 103,258$ 165,290 (37.5 %)
Volume (mcf) 71,847 73,374 (2.1 %)
Average Price (per mcf) $ 1.44$ 2.25 (36.0 %)
Production and exploration. Production costs were $219,395 for the three months
ended June 30, 2019, a 15% decrease from $258,935 for the three months ended
June 30, 2018. This decrease is primarily the result of a decrease in lease
operating expenses due to numerous required repairs and maintenance on our
operated wells during the three months ended June 30, 2018.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization ("DD&A") expense was $210,238 for the first quarter of fiscal 2020,
a 3% decrease from $216,075 for the first quarter of fiscal 2019, primarily due
to a decrease in gas production and a decrease in the full cost pool as a result
of a decrease in future development costs partially offset by a decrease in oil
and gas reserves.
General and administrative expenses. General and administrative expenses were
$311,061 for the three months ended June 30, 2019, a 25% increase from $249,038
for the three months ended June 30, 2018. This was primarily due to an increase
in engineering and contract services.
Interest expense. Interest expense was $6,356 for the first quarter of fiscal
2020, a decrease of 8% from $6,921 for the first quarter of fiscal 2019 due to a
decrease in borrowings partially offset by an increase in interest rate.
Income taxes. There was no income tax expense for the three months ended June
30, 2019 and for the three months ended June 30, 2018. The effective tax rate
for the three months ended June 30, 2019 and June 30, 2018 was 0%. We are in a
net deferred tax asset position and believe it is more likely than not that
these deferred tax assets will not be realized.
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