Unless the context otherwise requires, references to the "Company", "Mexco",
"we", "us" or "our" mean Mexco Energy Corporation and its consolidated
subsidiaries.
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
this 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
credit facility. We do not have any delivery commitments to provide a fixed and
determinable quantity of our oil and gas under any existing contract or
agreement.
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 royalty and working interests in non-operated properties in
areas with significant development potential.
At September 30, 2022, we had working capital of $2,298,977 compared to working
capital of $2,469,776 at March 31, 2022, a decrease of $170,789 for the reasons
set forth below.
Cash Flows
Changes in the net funds provided by or (used in) each of our operating,
investing and financing activities are set forth in the table below:
For the Six Months
Ended September 30,
2022 2021 Change
Net cash provided by operating
activities $ 3,418,087 $ 1,584,816 $ 1,833,271
Net cash used in investing
activities $ (4,253,453 ) $ (554,787 ) $ 3,698,666
Net cash provided by (used in)
financing activities $ 30,179 $ (994,268 ) $ 1,024,447
Page 12
Cash Flow Provided by Operating Activities. Cash flow from operating activities
is primarily derived from the production of our crude oil and natural gas
reserves and changes in the balances of non-cash accounts, receivables, payables
or other property asset account balances. Cash flow provided by our operating
activities for the six months ended September 30, 2022 was $3,418,087 in
comparison to $1,584,816 for the six months ended September 30, 2021. This
increase of $1,833,271 in our cash flow operating activities consisted of an
increase in our non-cash expenses of $251,742; a decrease in our accounts
receivable of $263,939; a decrease of $80,141 in our accounts payable and
accrued expenses; and, an increase in our net income for the current quarter of
$1,406,554. Variations in cash flow from operating activities may impact our
level of exploration and development expenditures.
Our expenditures in operating activities consist primarily of drilling expenses,
production expenses and engineering services. Our expenses also consist of
employee compensation, accounting, insurance and other general and
administrative expenses that we have incurred in order to address normal and
necessary business activities of a public company in the crude oil and natural
gas production industry.
Cash Flow Used in Investing Activities. Cash flow from investing activities is
derived from changes in oil and gas property balances. For the six months ended
September 30, 2022, we had net cash of $4,253,453 used for additions to oil and
gas properties compared to $554,787 for the six months ended September 30, 2021.
Cash Flow Provided by Financing Activities. Cash flow from financing activities
is derived from our changes in long-term debt and in equity account balances.
Cash flow provided by our financing activities was $30,179 for the six months
ended September 30, 2022 compared to cash flow used in our financing activities
of $994,268 for the six months ended September 30, 2021. During the six months
ended September 30, 2022, we received advances and made payments of $500,000 on
our credit facility and received payment of $30,179 from a director for profits
on purchase of stock within the six-month window of a previous sale of stock.
Accordingly, net cash decreased $805,187, leaving cash and cash equivalents on
hand of $565,579 as of September 30, 2022.
Oil and Natural Gas Property Development
New Participations in Fiscal 2023. The Company currently plans to participate in
the drilling and completion of 48 horizontal wells at an estimated aggregate
cost of approximately $4,300,000 for the fiscal year ending March 31, 2023, of
which 57% will be spent in the Delaware Basin and the remaining balance in the
Midland Basin. Thirty-six of these horizontal wells are in the Delaware Basin
located in the western portion of the Permian Basin in Lea and Eddy Counties,
New Mexico and twelve are in the Midland Basin located in the eastern portion of
the Permian Basin in Reagan County, Texas.
In April 2022, Mexco expended approximately $140,000 to participate in the
drilling of four horizontal wells in the Wolfcamp Sand formation of the Delaware
Basin in Lea County, New Mexico. Mexco's working interest in these wells is
.52%.
During the first six months of fiscal 2023, Mexco expended approximately
$1,196,000 to participate in the drilling and completion of three horizontal
wells in the Wolfcamp Sand formation of the Midland Basin located in the eastern
portion of the Permian Basin in Reagan County, Texas. Mexco's working interest
in these wells is 3.2%. These wells are currently being completed.
In May 2022, Mexco expended approximately $97,000 to participate in the drilling
of four horizontal wells in the Wolfcamp Sand formation of the Delaware Basin in
Lea County, New Mexico. Mexco's working interest in these wells is .52%.
Subsequently, in October 2022, Mexco expended approximately $148,000 to complete
these wells.
During the first six months of fiscal 2023, Mexco expended approximately
$607,000 to participate in the drilling and completion of a horizontal well in
the Wolfcamp Sand formation of the Midland Basin in Reagan County, Texas.
Mexco's working interest in this well is 5.1%. This well are currently being
completed.
During the first six months of fiscal 2023, Mexco expended approximately
$600,000 to participate in the drilling and completion of four horizontal wells
in the Bone Spring formation of the Delaware Basin in Eddy County, New Mexico.
Mexco's working interest in these wells is 2.1%. These wells are currently being
completed.
Page 13
In June 2022, Mexco expended approximately $157,000 to participate in the
drilling of four horizontal wells in the Wolfcamp Sand formation of the Delaware
Basin in Lea County, New Mexico. Mexco's working interest in these wells is
.52%.
In August 2022, Mexco expended approximately $33,000 to participate in the
drilling of two horizontal wells in the Penn Shale formation of the Delaware
Basin in Lea County, New Mexico. Mexco's working interest in these wells is
.22%.
Completion of Wells Drilled in Fiscal 2022. The Company expended approximately
$329,000 for the completion costs of 8 horizontal wells located in Lea County,
New Mexico that the Company participated in drilling during fiscal 2022. The
first 4 of these wells began producing in May 2022 with initial average
production rates of 1,384 barrels of oil, 3,530 barrels of water and 2,172,000
cubic feet of gas per day, or, 1,804 barrels of oil equivalent per day.
Subsequent Participations. In October 2022, Mexco expended approximately
$682,000 to participate in the drilling and completion of four horizontal wells
operated by XTO Energy, Inc. in the Bone Spring formation of the Delaware Basin
in Lea County, New Mexico. Mexco's working interest in these wells is 2.2%
Also in October 2022, Mexco expended $16,000 to participate in the drilling and
completion of three horizontal wells operated by Mewbourne Oil Company in the
Bone Spring formation of the Delaware Basin in Eddy County, New Mexico. Mexco's
working interest in these wells is .05%.
Acquisitions. The Company acquired various royalty (mineral) interests in 22
wells and several additional potential locations for development operated by
Chesapeake Energy Corporation and located in the Eagleford area of Dimmit
County, Texas for a purchase price of $939,000 which was effective April 1,
2022.
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 remained volatile 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 West Texas Intermediate ("WTI")
posted price for crude oil has ranged from a low of $61.55 per bbl in December
2021 to a high of $119.68 per bbl in March 2022. The Henry Hub Spot Market Price
("Henry Hub") for natural gas has ranged from a low of $3.32 per MMBtu in
December 2021 to a high of $9.85 per MMBtu in August 2022.
On September 30, 2022, the WTI posted price for crude oil was $75.47 and the
Henry Hub spot price for natural gas was $6.40 per MMBtu. See Results of
Operations below for realized prices.
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 September 30, 2022:
Payments due in:
less than 1
Total year 1 - 3 years over 3 years
Contractual obligations:
Leases (1) $ 106,773 $ 58,240 $ 48,533 $ -
(1) The lease amount represents the monthly rent amount for our principal office
space in Midland, Texas under a 38 month lease agreement effective May 15,
2018 and extended another 36 months to July 31, 2024. Of this total
obligation for the remainder of the lease, our majority shareholder will pay
$15,572 less than 1 year and $12,977 1-3 years for his portion of the shared
office space.
Results of Operations - Three Months Ended September 30, 2022 Compared to Three
Months Ended September 30, 2021. There was net income of $1,211,716 for the
quarter ended September 30, 2022 compared to net income of $708,828 for the
quarter ended September 30, 2021. This was a result of an increase in oil and
gas prices and an increase in gas production partially offset by an increase in
operating expenses and a decrease in oil production that is further explained
below.
Page 14
Oil and gas sales. Revenue from oil and gas sales was $2,281,895 for the second
quarter of fiscal 2023, a 48% increase from $1,541,171 for the same period of
fiscal 2022. This resulted from an increase in oil and gas prices and an
increase in gas production partially offset by a decrease in oil production.
2022 2021 % Difference
Oil:
Revenue $ 1,397,875 $ 1,133,134 23.4 %
Volume (bbls) 14,520 16,277 (10.8 %)
Average Price (per bbl) $ 96.27 $ 69.62 38.3 %
Gas:
Revenue $ 884,020 $ 408,037 116.7 %
Volume (mcf) 118,607 92,607 28.1 %
Average Price (per mcf) $ 7.45 $ 4.41 68.9 %
Production and exploration. Production costs were $394,445 for the second
quarter of fiscal 2023, an 18% increase from $335,588 for the same period of
fiscal 2022. This is primarily the result of an increase in production taxes and
marketing charges as a result of the increase in oil and gas revenues.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization expense was $384,379 for the second quarter of fiscal 2023, a 37%
increase from $280,060 for the same period of fiscal 2022, primarily due to an
increase in production and an increase in the full cost pool amortization base
partially offset by an increase in reserves.
General and administrative expenses. General and administrative expenses were
$322,919 for the second quarter of fiscal 2023, a 51% increase from $214,242 for
the same period of fiscal 2022. This was primarily due to an increase in
salaries and contract services, legal fees, employee stock option compensation
and shareholder services.
Interest expense. Interest expense was $3,561 for the second quarter of fiscal
2023, a 53% decrease from $7,530 for the same period of fiscal 2022, 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
September 30, 2022 and 2021. The effective tax rate for the three months ended
September 30, 2022 and 2021 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.
Results of Operations - Six Months Ended September 30, 2022 Compared to Six
Months Ended September 30, 2021. For the six months ended September 30, 2022,
there was net income of $2,510,388 compared to net income of $1,103,834 for the
six months ended September 30, 2021. This was a result of an increase in
operating revenues partially offset by an increase in operating expenses that is
further explained below.
Oil and gas sales. Revenue from oil and gas sales was $4,698,008 for the six
months ended September 30, 2022, a 68% increase from $2,796,736 for the same
period of fiscal 2022. This resulted from an increase in oil and gas prices and
an increase in gas production partially offset by a decrease in oil production.
2022 2021 % Difference
Oil:
Revenue $ 2,957,196 $ 2,120,237 39.5 %
Volume (bbls) 28,744 31,715 (9.4 %)
Average Price (per bbl) $ 102.88 $ 66.85 53.9 %
Gas:
Revenue $ 1,740,812 $ 676,499 157.3 %
Volume (mcf) 248,313 182,670 35.9 %
Average Price (per mcf) $ 7.01 $ 3.70 89.5 %
Production and exploration. Production costs were $829,473 for the six months
ended September 30, 2022, a 35% increase from $612,575 for the six months ended
September 30, 2021. This is primarily the result of an increase in production
taxes and marketing charges as a result of the increase in oil and gas revenues.
Page 15
Depreciation, depletion and amortization. Depreciation, depletion and
amortization expense was $771,507 for the six months ended September 30, 2022,
an 42% increase from $544,380 for the six months ended September 30, 2021,
primarily due to an increase in production and an increase in the full cost pool
amortization base partially offset by an increase in reserves.
General and administrative expenses. General and administrative expenses were
$641,449 for the six months ended September 30, 2022, a 23% increase from
$522,409 for the six months ended September 30, 2021. This was primarily due to
an increase in salaries and contract services, employee stock option
compensation, legal fees and shareholder services.
Interest expense. Interest expense was $6,692 for the six months ended September
30, 2022, a 67% decrease from $20,249 for the same period fiscal 2022 due to a
decrease in borrowings partially offset by an increase in interest rate.
Income taxes. There was no income tax expense for the six months ended September
30, 2022 and 2021. The effective tax rate for the six months ended September 30,
2022 and 2021 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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