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
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 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 its 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 royalties and working interests in non-operated properties in
areas with significant development potential.
At December 31, 2022, we had working capital of $2,468,314 compared to working
capital of $2,469,776 at March 31, 2022, a decrease of $1,462 for the reasons
set forth below.
12
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 Nine Months Ended
December 31,
2022 2021 Change
Net cash provided by operating activities 4,350,920 2,728,586 1,622,334
Net cash used in investing activities
(4,969,269 ) (1,021,849 ) 3,947,420
Net cash used in financing activities (121,381 ) (884,360 ) (762,979 )
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 non-energy property asset account balances. Cash flow provided by our
operating activities for the nine months ended December 31, 2022 was $4,350,920
in comparison to $2,728,586 for the nine months ended December 31, 2021. This
increase of $1,622,334 in our cash flow operating activities consisted of an
increase in our non-cash expenses of $496,349; an increase in our accounts
receivable of $639,657; and, an increase in our net income for the current nine
months of $1,898,037. 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 nine months ended
December 31, 2022, we had net cash of $4,969,269 used for additions to oil and
gas properties compared to $1,021,849 for the nine months ended December 31,
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 used in our financing activities was $121,381 for the nine months
ended December 31, 2022 compared to cash flow used in our financing activities
of $884,360 for the nine months ended December 31, 2021. During the nine months
ended December 31, 2022, we received advances and made repayments of $675,000 on
our credit facility, received proceeds of $16,700 from the exercise of director
stock options, received payment of $30,179 from a director for profits on
purchase of stock within the six-month window of a previous stock sale, and
expended $168,260 for the purchase of 12,416 shares of our stock for the
treasury.
Accordingly, net cash decreased $739,730, leaving cash and cash equivalents on
hand of $631,036 as of December 31, 2022.
Oil and Natural Gas Property Development.
New Participations in Fiscal 2023. The Company currently plans to participate in
the drilling and completion of 50 horizontal wells at an estimated aggregate
cost of approximately $4,000,000 for the fiscal year ending March 31, 2023, of
which 53% will be spent in the Delaware Basin and the remaining balance in the
Midland Basin. Thirty-eight 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 $176,000 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%.
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 were
completed in October 2022 with initial average production rates of 507 barrels
of oil, 2,147 barrels of water and 2,147,000 cubic feet of gas per day, or, 560
barrels of oil equivalent per day.
Mexco expended approximately $681,000 to participate in the drilling and
completion of eight 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%. These wells are currently being completed.
13
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 was completed in October 2022 with initial average production rates of
134 barrels of oil, 874 barrels of water and 143,000 cubic feet of gas per day,
or, 158 barrels of oil equivalent per day.
Mexco expended approximately $625,000 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 began producing in October 2022 with initial average
production rates of 1,154 barrels of oil, 2,887 barrels of water and 2,966,000
cubic feet of gas per day, or, 1,648 barrels of oil equivalent per day.
Mexco expended approximately $78,000 to participate in the drilling and
completion 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%. These wells are currently being completed.
Mexco expended approximately $85,000 to participate in the drilling and
completion of eight horizontal wells in the Spraberry trend of the Midland Basin
in Reagan County, Texas. Mexco's working interest in these wells is
approximately .08%. These wells are currently being completed.
Mexco expended $16,000 to participate in the drilling and completion of three
horizontal wells in the Bone Spring formation of the Delaware Basin in Eddy
County, New Mexico. Mexco's working interest in these wells is .05%. These wells
are currently being completed.
In October 2022, the Company made an approximately 2% equity investment
commitment in a limited liability company amounting to $2,000,000 of which
$200,000 has been funded through December 31, 2022. The limited liability
company is capitalized at approximately $100 million to purchase mineral
interests in the Utica and Marcellus areas in the state of Ohio.
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 and the remaining 4 were
completed in November 2022 with initial average production rates of 953 barrels
of oil, 4,063 barrels of water and 3,071,000 cubic feet of gas per day, or,
1,465 barrels of oil equivalent per day.
Acquisitions in Fiscal 2023. 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.
Subsequent Participations. In January 2023, Mexco expended $180,000 to
participate in the drilling of four horizontal wells in the Wolfcamp Sand
formation of the Delaware Basin in Lea County, New Mexico.
In February 2023, Mexco expended approximately $31,000 to participate in the
drilling and completion of seven horizontal wells in the Bone Spring formation
of the Delaware Basin in Lea County, New Mexico.
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 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 $67.00 per bbl in December 2022 to a high of
$119.68 per bbl in March 2022. The Henry Hub Spot Market Price ("Henry Hub")
posted price for natural gas has ranged from a low of $3.46 per MMBtu in
November 2022 to a high of $9.85 per MMBtu in August 2022.
On December 31, 2022, the WTI posted price for crude oil was $76.24 and the
Henry Hub posted price for natural gas was $3.52. See Results of Operations
below for realized price.
14
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 December 31, 2022:
Payments due in:
less than 1
Total year 1 - 3 years over 3 years
Contractual obligations:
Leases (1) $ 92,213 $ 58,240 $ 33,973 $ -
(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 $9,083 1-3 years for his portion of the shared
office space.
Results of Operations - Three Months Ended December 31, 2022 and 2021. For the
quarter ended December 31, 2022, there was net income of $1,244,785 compared to
$753,302 for the quarter ended December 31, 2021, a 65% increase as a result of
an increase in operating revenues due to an increase in oil and gas production
and prices partially offset by an increase in operating expenses that is further
explained below.
Oil and gas sales. Revenue from oil and gas sales was $2,486,017 for the third
quarter of fiscal 2023, a 58% increase from $1,573,984 for the same period of
fiscal 2022. This resulted from an increase in oil and natural gas production
volumes and an increase in oil price partially offset by a decrease in natural
gas price.
2022 2021 % Difference
Oil:
Revenue $ 1,750,539 $ 1,073,078 63.1 %
Volume (bbls) 21,308 14,142 50.7 %
Average Price (per bbl) $ 82.15 $ 75.88 8.3 %
Gas:
Revenue $ 735,478 $ 500,906 46.8 %
Volume (mcf) 145,980 91,534 59.5 %
Average Price (per mcf) $ 5.04 $ 5.47 (7.9 %)
Production and exploration. Production costs were $478,670 for the third quarter
of fiscal 2023, a 64% increase from $291,068 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 $496,509 for the third quarter of fiscal 2023, an 85%
increase from $268,018 for the same period of fiscal 2022, primarily due to an
increase in production and full cost pool amortization base partially offset by
an increase in oil and gas reserves.
General and administrative expenses. General and administrative expenses were
$288,536 for the third quarter of fiscal 2023, a 20% increase from $239,767 for
the same period of fiscal 2022. This was primarily due to an increase in
salaries, employee stock option compensation and accounting fees.
Interest expense. Interest expense was $3,230 for the third quarter of fiscal
2023, a 3% increase from $3,132 for the same period of fiscal 2022, due to an
increase in interest rate.
Income taxes. Income tax expense was $61,986 for the three months ended December
31, 2022, an 89% increase from $32,785 for the three months ended December 31,
2021 consisting only of state income tax. This increase was due to our
continuing development program primarily in the State of New Mexico. The
effective tax rate for the three months ended December 31, 2022 and 2021 was 5%
and 4%, respectively. For federal income tax purposes, 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 - Nine Months Ended December 31, 2022 and 2021. For the
nine months ended December 31, 2022, there was a net income of $3,755,173
compared to net income of $1,857,136 for the nine months ended December 31,
2021. This was a result of an increase in operating revenues due to an increase
in oil and gas production volumes and prices partially offset by an increase in
operating expenses that is further explained below.
15
Oil and gas sales. Revenue from oil and gas sales was $7,184,025 for the nine
months ended December 31, 2022, a 64% increase from $4,370,720 for the same
period of fiscal 2022. This resulted from an increase in oil and natural gas
prices and an increase in oil and natural gas production volumes.
2022 2021 % Difference
Oil:
Revenue $ 4,707,735 $ 3,193,315 47.4 %
Volume (bbls) 50,052 45,857 9.1 %
Average Price (per bbl) $ 94.06 $ 69.64 35.1 %
Gas:
Revenue $ 2,476,290 $ 1,177,405 110.3 %
Volume (mcf) 394,293 274,204 43.8 %
Average Price (per mcf) $ 6.28 $ 4.29 46.3 %
Production and exploration. Production costs were $1,308,143 for the nine months
ended December 31, 2022, a 45% increase from $903,643 for the nine months ended
December 31, 2021. This increase 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 $1,268,016 for the nine months ended December 31, 2022,
a 56% increase from $812,398 for the nine months ended December 31, 2021, due to
an increase production and full cost pool amortization base partially offset by
an increase in oil and gas reserves.
General and administrative expenses. General and administrative expenses were
$876,735 for the nine months ended December 31, 2022, a 19% increase from
$739,469 for the nine months ended December 31, 2021. This was primarily due to
an increase in employee stock option compensation, salaries and contract
services, and legal fees.
Interest expense. Interest expense was $9,770 for the nine months ended December
31, 2022, a 58% decrease from $23,255 for the nine months ended December 31,
2021 due to a decrease in borrowings.
Income taxes. Income tax expense was $115,236 for the nine months ended December
31, 2022, a 108% increase from $55,492 for the nine months ended December 31,
2021 consisting only of state income tax. This increase was due to our
continuing development program primarily in the State of New Mexico. The
effective tax rate for the nine months ended December 31, 2022 and 2021 was 3%.
For federal income tax purposes, 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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