CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55,888
|
|
|
$
|
73,451
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
|
|
314,760
|
|
|
|
381,414
|
|
Trade
|
|
|
17,407
|
|
|
|
13,744
|
|
Prepaid costs and expenses
|
|
|
36,463
|
|
|
|
36,325
|
|
Total current assets
|
|
|
424,518
|
|
|
|
504,934
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
|
|
|
|
|
|
|
Oil and gas properties, using the full cost method
|
|
|
37,599,713
|
|
|
|
37,640,096
|
|
Other, net
|
|
|
107,484
|
|
|
|
107,484
|
|
Accumulated depreciation, depletion and amortization
|
|
|
(26,169,371
|
)
|
|
|
(25,572,606
|
)
|
Property and equipment, net
|
|
|
11,537,826
|
|
|
|
12,174,974
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
|
28,886
|
|
|
|
28,157
|
|
Total assets
|
|
$
|
11,991,230
|
|
|
$
|
12,708,065
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
366,554
|
|
|
$
|
137,259
|
|
Total current liabilities
|
|
|
366,554
|
|
|
|
137,259
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
2,468,000
|
|
|
|
2,900,000
|
|
Asset retirement obligations
|
|
|
925,301
|
|
|
|
968,484
|
|
Total liabilities
|
|
|
3,759,855
|
|
|
|
4,005,743
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock - $1.00 par value; 10,000,000 shares authorized; none outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock - $0.50 par value; 40,000,000 shares authorized; 2,104,266 shares issued and 2,037,266 shares outstanding as of September 30, 2017 and March 31, 2017
|
|
|
1,052,133
|
|
|
|
1,052,133
|
|
Additional paid-in capital
|
|
|
7,258,623
|
|
|
|
7,244,848
|
|
Retained earnings
|
|
|
266,620
|
|
|
|
751,342
|
|
Treasury stock, at cost (67,000 shares)
|
|
|
(346,001
|
)
|
|
|
(346,001
|
)
|
Total stockholders’ equity
|
|
|
8,231,375
|
|
|
|
8,702,322
|
|
Total liabilities and stockholders’ equity
|
|
$
|
11,991,230
|
|
|
$
|
12,708,065
|
|
The
accompanying notes are an integral part of
the
consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Operating revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas
|
|
$
|
610,451
|
|
|
$
|
546,164
|
|
|
$
|
1,261,893
|
|
|
$
|
1,082,567
|
|
Other
|
|
|
8,637
|
|
|
|
34,678
|
|
|
|
24,879
|
|
|
|
168,458
|
|
Total operating revenues
|
|
|
619,088
|
|
|
|
580,842
|
|
|
|
1,286,772
|
|
|
|
1,251,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
254,842
|
|
|
|
226,548
|
|
|
|
564,705
|
|
|
|
487,492
|
|
Accretion of asset retirement obligations
|
|
|
8,308
|
|
|
|
8,895
|
|
|
|
16,557
|
|
|
|
17,691
|
|
Depreciation, depletion, and amortization
|
|
|
285,507
|
|
|
|
297,370
|
|
|
|
596,765
|
|
|
|
605,752
|
|
General and administrative
|
|
|
232,869
|
|
|
|
236,367
|
|
|
|
539,528
|
|
|
|
580,613
|
|
Total operating expenses
|
|
|
781,526
|
|
|
|
769,180
|
|
|
|
1,717,555
|
|
|
|
1,691,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(162,438
|
)
|
|
|
(188,338
|
)
|
|
|
(430,783
|
)
|
|
|
(440,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2
|
|
|
|
9
|
|
|
|
11
|
|
|
|
172
|
|
Interest expense
|
|
|
(26,734
|
)
|
|
|
(49,573
|
)
|
|
|
(53,950
|
)
|
|
|
(91,007
|
)
|
Net other expense
|
|
|
(26,732
|
)
|
|
|
(49,564
|
)
|
|
|
(53,939
|
)
|
|
|
(90,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(189,170
|
)
|
|
|
(237,902
|
)
|
|
|
(484,722
|
)
|
|
|
(531,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(189,170
|
)
|
|
$
|
(237,902
|
)
|
|
$
|
(484,722
|
)
|
|
$
|
(531,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
The
accompanying notes are an integral part of
the
consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
Common Stock Par Value
|
|
|
Treasury Stock
|
|
|
Additional Paid-In Capital
|
|
|
Retained Earnings
|
|
|
Total
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2017
|
|
$
|
1,052,133
|
|
|
$
|
(346,001
|
)
|
|
$
|
7,244,848
|
|
|
$
|
751,342
|
|
|
$
|
8,702,322
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(484,722
|
)
|
|
|
(484,722
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
13,775
|
|
|
|
-
|
|
|
|
13,775
|
|
Balance at September 30, 2017
|
|
$
|
1,052,133
|
|
|
$
|
(346,001
|
)
|
|
$
|
7,258,623
|
|
|
$
|
266,620
|
|
|
$
|
8,231,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARE ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares, issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2017
|
|
|
|
|
|
|
2,104,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
|
|
|
|
2,104,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares, held in treasury:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2017
|
|
|
|
|
|
|
(67,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
|
|
|
|
(67,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares, outstanding at September 30, 2017
|
|
|
|
|
|
|
2,037,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of
the
consolidated financial statements.
Mexco
Energy Corporation and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Six Months Ended September 30,
(Unaudited)
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(484,722
|
)
|
|
$
|
(531,358
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
13,775
|
|
|
|
31,686
|
|
Depreciation, depletion and amortization
|
|
|
596,765
|
|
|
|
605,752
|
|
Accretion of asset retirement obligations
|
|
|
16,557
|
|
|
|
17,691
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
62,991
|
|
|
|
(103,613
|
)
|
(Increase) decrease in prepaid expenses
|
|
|
(139
|
)
|
|
|
26,312
|
|
Increase in noncurrent assets
|
|
|
-
|
|
|
|
(25,219
|
)
|
Increase in accounts payable and accrued expenses
|
|
|
127,737
|
|
|
|
119,046
|
|
Settlement of asset retirement obligations
|
|
|
(6,529
|
)
|
|
|
(89,272
|
)
|
Net cash provided by operating activities
|
|
|
326,435
|
|
|
|
51,025
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions to oil and gas properties
|
|
|
(481,005
|
)
|
|
|
(268,077
|
)
|
Drilling refund
|
|
|
19,500
|
|
|
|
75,808
|
|
Proceeds from sale of oil and gas properties and equipment
|
|
|
549,507
|
|
|
|
193,846
|
|
Net cash provided by (used in) investing activities
|
|
|
88,002
|
|
|
|
1,577
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Reduction of long-term debt
|
|
|
(432,000
|
)
|
|
|
(60,000
|
)
|
Net cash used in financing activities
|
|
|
(432,000
|
)
|
|
|
(60,000
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(17,563
|
)
|
|
|
(7,398
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
73,451
|
|
|
|
34,013
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
55,888
|
|
|
$
|
26,615
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
54,884
|
|
|
$
|
89,627
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Asset retirement obligations
|
|
$
|
4,167
|
|
|
$
|
3,614
|
|
The
accompanying notes are an integral part of
the
consolidated financial statements.
MEXCO
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Nature of Operations
Mexco
Energy Corporation (a Colorado corporation) and its wholly owned subsidiaries, Forman Energy Corporation (a New York corporation),
Southwest Texas Disposal Corporation (a Texas corporation) and TBO Oil & Gas, LLC (a Texas limited liability company) (collectively,
the “Company”) are engaged in the exploration, development and production of natural gas, crude oil, condensate and
natural gas liquids (“NGLs”). Most of the Company’s oil and gas interests are centered in West Texas; however,
the Company owns producing properties and undeveloped acreage in thirteen states. Although most of the Company’s oil and
gas interests are operated by others, the Company operates five wells in which it owns an interest.
2.
Basis of Presentation and Significant Accounting Policies
Principles
of Consolidation
. The consolidated financial statements include the accounts of Mexco Energy Corporation and its wholly owned
subsidiaries. All significant intercompany balances and transactions associated with the consolidated operations have been eliminated.
Estimates
and Assumptions
. In preparing financial statements in conformity with accounting principles generally accepted in the United
States of America, management is required to make informed judgments, estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses
during the reporting period. In addition, significant estimates are used in determining proved oil and gas reserves. Although
management believes its estimates and assumptions are reasonable, actual results may differ materially from those estimates. The
estimate of the Company’s oil and natural gas reserves, which is used to compute depreciation, depletion, amortization and
impairment of oil and gas properties, is the most significant of the estimates and assumptions that affect these reported results.
Interim
Financial Statements.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position of the Company as
of September 30, 2017, and the results of its operations and cash flows for the interim periods ended September 30, 2017 and 2016.
The consolidated financial statements as of September 30, 2017 and for the three and six month periods ended September 30, 2017
and 2016 are unaudited. The consolidated balance sheet as of March 31, 2017 was derived from the audited balance sheet filed in
the Company’s 2017 annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The
results of operations for the periods presented are not necessarily indicative of the results to be expected for a full year.
The accounting policies followed by the Company are set forth in more detail in Note 2 of the “Notes to Consolidated Financial
Statements” in the Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in
this Form 10-Q pursuant to the rules and regulations of the SEC. However, the disclosures herein are adequate to make the information
presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements
and notes thereto included in the Form 10-K.
3.
Asset Retirement Obligations
The
Company’s asset retirement obligations (“ARO”) relate to the plugging of wells, the removal of facilities and
equipment, and site restoration on oil and gas properties. The fair value of a liability for an ARO is recorded in the period
in which it is incurred, discounted to its present value using the credit adjusted risk-free interest rate, and a corresponding
amount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period, and
the capitalized cost is depreciated over the useful life of the related asset. The ARO is included in the Consolidated Balance
Sheets with the current portion being included in the accounts payable and other accrued expenses.
The
following table provides a rollforward of the AROs for the first six months of fiscal 2018:
Carrying amount of asset retirement obligations as of April 1, 2017
|
|
$
|
978,484
|
|
Liabilities incurred
|
|
|
4,167
|
|
Liabilities settled
|
|
|
(63,907
|
)
|
Accretion expense
|
|
|
16,557
|
|
Carrying amount of asset retirement obligations as of September 30, 2017
|
|
|
935,301
|
|
Less: Current portion
|
|
|
10,000
|
|
Non-Current asset retirement obligation
|
|
$
|
925,301
|
|
4.
Credit Facility
The
Company has a loan agreement with Bank of America, N.A. (the “Agreement”), which provided for a credit facility of
$5,570,000 with no monthly commitment reductions and a borrowing base to be evaluated on July 30 and January 1 of each year or
at any additional time in the Bank’s discretion. The borrowing base was evaluated on July 31, 2017 and set at $2,525,500.
The borrowing base also resets to the extent the Company sells or otherwise disposes of any of its oil and gas properties as the
Company is required to pay 100% of such net proceeds to the lender resulting in a permanent reduction of the borrowing base unless
prior approval by Bank states otherwise. As of September 30, 2017, the borrowing base was set at $2,518,000.
The
Agreement was renewed eleven times with the eleventh amendment effective as of March 8, 2017 with a maturity date of November
30, 2020. Under such renewal agreement, interest on the facility accrues at an annual rate equal to the British Bankers Association
London Interbank Offered Rate (“BBA LIBOR”) daily floating rate, plus 3.0 percentage points, which was 4.24% on September
30, 2017. Interest on the outstanding amount under the credit agreement is payable monthly. There was no availability of this
line of credit at September 30, 2017. No principal payments are anticipated to be required through November 30, 2020. Amounts
borrowed under the Agreement are collateralized by the common stock of the Company’s wholly owned subsidiaries and substantially
all of the Company’s oil and gas properties.
The
Agreement contains customary covenants for credit facilities of this type including limitations on change in control, disposition
of assets, mergers and reorganizations. The Company is also obligated to meet certain financial covenants under the Agreement
and requires minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”) of $650,000 for each
trailing four fiscal quarters and minimum interest coverage ratio (EBITDA/Interest Expense) of 2.00 to 1.00 for each quarter.
The Company is in compliance with all covenants as of September 30, 2017 and believes it will remain in compliance for the next
fiscal year.
In
addition, this Agreement prohibits the Company from paying cash dividends on its common stock. The Agreement does grant the Company
permission to enter into hedge agreements however, it is under no obligation to do so.
The
amended Agreement allows for up to $500,000 of the facility to be used for outstanding letters of credit. As of September 30,
2017, one letter of credit for $50,000, in lieu of plugging bond with the Texas Railroad Commission (“TRRC”) covering
the properties the Company operates is outstanding under the facility. This letter of credit renews annually. The Company will
pay a fee in an amount equal to 1 percent (1.0%) per annum of the outstanding undrawn amount of each standby letter of credit,
payable monthly in arrears, on the basis of the face amount outstanding on the day the fee is calculated.
The
balance outstanding on the line of credit as of September 30, 2017 was $2,468,000. The following table is a summary of activity
on the Bank of America, N.A. line of credit for the six months ended September 30, 2017:
|
|
Principal
|
|
Balance at April 1, 2017:
|
|
$
|
2,900,000
|
|
Borrowings
|
|
|
-
|
|
Repayments
|
|
|
(432,000
|
)
|
Balance at September 30, 2017:
|
|
$
|
2,468,000
|
|
5.
Income Taxes
A
valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that
some or all of the benefit from the deferred tax asset will not be realized. To assess that likelihood, we use estimates and judgment
regarding our future taxable income, and we consider the tax consequences in the jurisdiction where such taxable income is generated,
to determine whether a valuation allowance is required. Such evidence can include our current financial position, our results
of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as the
current and forecasted business economics of our industry.
Based
on the material write-downs of the carrying value of our oil and natural gas properties during fiscal 2016, we are in a net deferred
tax asset position as of September 30, 2017. Our deferred tax asset is $1,333,489 as of September 30, 2017 with a valuation amount
of $1,333,489. We believe it is more likely than not that these deferred tax assets will not be realized. Management assesses
the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit
the use of deferred tax assets. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates
of future taxable income are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer
present and additional weight is given to subjective evidence such as future expected growth.
6.
Related Party Transactions
Related
party transactions for the Company relate to shared office expenditures in addition to administrative and operating expenses paid
on behalf of the principal stockholder. The total billed to and reimbursed by the stockholder for the three months ended September
30, 2017 and 2016 was $9,649 and $6,852, respectively. The total billed to and reimbursed by the stockholder for the six months
ended September 30, 2017 and 2016 was $18,481 and $12,495, respectively.
7.
Loss Per Common Share
The
Company’s basic net loss per share has been computed based on the weighted average number of common shares outstanding during
the period. Diluted net loss per share assumes the exercise of all stock options having exercise prices less than the average
market price of the common stock during the period using the treasury stock method and is computed by dividing net loss by the
weighted average number of common shares and dilutive potential common shares (stock options) outstanding during the period. In
periods where losses are reported, the weighted-average number of common shares outstanding excludes potential common shares,
because their inclusion would be anti-dilutive.
The
following is a reconciliation of the number of shares used in the calculation of basic and diluted net loss per share for the
three and six month periods ended September 30, 2017 and 2016.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(189,170
|
)
|
|
$
|
(237,902
|
)
|
|
$
|
(484,722
|
)
|
|
$
|
(531,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted avg. shares outstanding – basic
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
Effect of assumed exercise of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted avg. shares outstanding – dilutive
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
2,037,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.26
|
)
|
Due
to a net loss for the for the three and six months ended September 30, 2017 and 2016, the weighted average number
of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
8.
Subsequent Events
The
Company completed a review and analysis of all events that occurred after the consolidated balance sheet date to determine if
any such events must be reported and has determined that there are no subsequent events to be disclosed.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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 pledge 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 its oil and gas under
any existing contract or agreement.
Due
to depressed 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 minerals,
royalties and working interests and non-operated properties in areas with significant development potential.
For
the first six months of fiscal 2018, cash flow from operations was $326,435, a 540% increase when compared to the
corresponding period of fiscal 2017. Cash of $549,507 was received from the sale of oil and gas properties, cash of $19,500 was
refunded for a drilling prepayment, cash of $432,000 was used to reduce the line of credit, cash of $481,005 was used for additions
to oil and gas properties and cash of $6,529 was used to settle asset retirement obligations. Accordingly, net cash decreased
$17,563.
At
September 30, 2017, we had working capital of $57,964 compared to working capital of $367,675 at March 31, 2017, a decrease of
$309,711 for the reasons set forth below.
Oil
and Natural Gas Property Developments and Transactions
During
fiscal 2017, Mexco participated with various percentage interests in seventeen horizontal wells in the Delaware Basin, a sub basin
located in the western portion of the Permian Basin in Eddy and Lea Counties, New Mexico with aggregate costs of $723,800 as of
September 30, 2017.
During
the second quarter of fiscal 2018, the last two of these seventeen wells were completed flowing at an average rate of 1,004 barrels
of oil; 1,231 barrels of water; and, 1,363,000 cubic feet of gas per day, or 1,231 barrels of oil equivalent per day, with an
average flowing tubing pressure of 768 pounds per square inch, on 48/64 inch chokes. Mexco’s working interests in these
two wells is .18%.
In
addition to an indeterminate number of wells to be drilled by other operators on Mexco’s royalty interests, the Company
currently expects to participate in the drilling and completion of approximately 30 horizontal wells at an estimated aggregate
cost of approximately $1,200,000 for the fiscal year ending March 31, 2018. The operators of these wells include Apache
Corporation, Bold Energy III, LLC, Concho Resources, Inc., Mewbourne Oil Company, XTO Energy, Inc. and others.
As
of September 30, 2017, fourteen of these horizontal wells are in various stages of drilling or completion operations and approximately
$486,000 of these costs has been expended. These fourteen wells are also located in the Delaware Basin.
During
the first quarter of fiscal 2018, the Company sold for a total consideration of $460,461, leasehold interests in 137 net acres
in the Scoop-Stack areas of Canadian and Grady Counties, Oklahoma. The first of these transactions in which the Company retained
its interests in the existing producing wellbores on the acreage was in the amount of $336,730. The second transaction in the
amount of $123,731 included the producing wellbores as well as the acreage. Of these proceeds, $410,000 was applied to reduce
bank indebtedness and the balance of $50,461 was applied to working capital of the Company.
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, cash flow from operations and sales of non-core properties.
Crude
oil and natural gas prices have remained significantly depressed during the last year. Lower product prices reduce our cash flow
from operations and diminish the present value of our oil and gas reserves. Lower product prices also offer us less incentive
to assume the drilling risks that are inherent in our business. 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 $39.00 per bbl in June 2017 to a high of $50.75 per bbl in February 2017.
The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $2.08 per MMBtu in November
2016 to a high of $3.80 per MMBtu in December 2016. On September 30, 2017 the WTI posted price for crude oil was $48.25 per bbl
and the Henry Hub spot price for natural gas was $2.94 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 September 30, 2017:
|
|
Payments due in:
|
|
|
|
Total
|
|
|
less than 1 year
|
|
|
1 - 3 years
|
|
|
over 3 years
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured bank line of credit (1)
|
|
$
|
2,468,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,468,000
|
|
Leases (2)
|
|
$
|
9,510
|
|
|
$
|
9,510
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(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 $104,602 less than 1 year,
$209,204 1-3 years and $17,433 over 3 years.
|
|
|
|
|
(2)
|
The
lease amount represents the monthly rent amount for our principal office space in Midland, Texas under one three year lease
agreement effective April 1, 2013 and a second three year lease agreement effective April 1, 2014. In February 2016, the option
to renew the 2013 lease for two years was exercised. The 2014 lease expired on April 1, 2017. The total obligation for the
remainder of the 2013 lease is $14,130 which includes $4,620 billed to and reimbursed by our majority shareholder for his
portion of the shared office space.
|
Results
of Operations – Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016.
There was a
net loss of $189,170 for the quarter ended September 30, 2017 compared to a net loss of $237,902 for the quarter ended September
30, 2016. This was primarily a result of an increase in oil and gas revenues and a decrease in interest expense partially
offset by a decrease in other operating revenue and an increase in operating expenses.
Oil
and gas sales.
Revenue from oil and gas sales was $610,451 for the second quarter of fiscal 2018, a 12% increase from $546,164
for the same period of fiscal 2017. This resulted from an increase in oil and gas prices partially offset by a decrease in oil
and gas production for the three months ended September 30, 2017.
|
|
2017
|
|
|
2016
|
|
|
% Difference
|
|
Oil:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
382,006
|
|
|
$
|
354,498
|
|
|
|
8.0
|
%
|
Volume (bbls)
|
|
|
8,470
|
|
|
|
8,511
|
|
|
|
(0.5
|
%)
|
Average Price (per bbl)
|
|
$
|
45.10
|
|
|
$
|
41.65
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
228,445
|
|
|
$
|
191,666
|
|
|
|
19.2
|
%
|
Volume (mcf)
|
|
|
84,120
|
|
|
|
89,924
|
|
|
|
(6.5
|
%)
|
Average Price (per mcf)
|
|
$
|
2.72
|
|
|
$
|
2.13
|
|
|
|
27.7
|
%
|
Other
operating revenue.
Other operating revenue was $8,637 for the three months ended September 30, 2017 compared to $34,678 for
the three months ended September 30, 2016 primarily due to the three year note portion of the settlement of a lawsuit for underpayment
of royalties paid last year from Chesapeake Energy Corporation and Total E&P USA in the amount of $25,219.
Production
and exploration.
Production costs were $254,842 for the second quarter of fiscal 2018, a 12% increase from $226,548 for the
same period of fiscal 2017. This increase is primarily the result of an increase in lease operating expense for well repairs on
non-operated properties and an increase in production taxes due to the increase in oil and gas sales.
Depreciation,
depletion and amortization.
Depreciation, depletion and amortization expense was $285,507 for the second quarter of fiscal
2018, a 4% decrease from $297,370 for the same period of fiscal 2017, primarily due to a decrease in oil and gas production and
an increase in oil and gas reserves partially offset by an increase in future development costs.
General
and administrative expenses.
General and administrative expenses were $232,869 for the second quarter of fiscal 2018, a 1.5%
decrease from $236,367 for the same period of fiscal 2017. This was primarily due to a decrease in legal fees, stock option compensation
and insurance costs partially offset by an increase in accounting fees and salary expense.
Interest
expense.
Interest expense was $26,734 for the second quarter of fiscal 2018, a 46% decrease from $49,573 for the same period
of fiscal 2017, 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, 2017 and for the three months ended September
30, 2016. The effective tax rate for the three months ended September 30, 2017 and September 30, 2016 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, 2017 Compared to Six Months Ended September 30, 2016.
For the six months
ended September 30, 2017, there was a net loss of $484,722 compared to a net loss of $531,358 for the six months ended September
30, 2016. This was a result of an increase in operating revenues and a decrease in interest expense partially offset by
an increase in total operating expenses.
Oil
and gas sales.
Revenue from oil and gas sales was $1,261,893 for the six months ended September 30, 2017, a 17% increase from
$1,082,567 for the same period of fiscal 2017. This resulted from an increase in oil and gas prices and oil production partially
offset by a decrease in gas production for the six months ended September 30, 2017.
|
|
2017
|
|
|
2016
|
|
|
% Difference
|
|
Oil:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
805,421
|
|
|
$
|
741,512
|
|
|
|
8.6
|
%
|
Volume (bbls)
|
|
|
17,969
|
|
|
|
17,932
|
|
|
|
-
|
|
Average Price (per bbl)
|
|
$
|
44.82
|
|
|
$
|
41.35
|
|
|
|
8.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
456,472
|
|
|
$
|
341,055
|
|
|
|
33.8
|
%
|
Volume (mcf)
|
|
|
174,016
|
|
|
|
179,094
|
|
|
|
(2.8
|
%)
|
Average Price (per mcf)
|
|
$
|
2.62
|
|
|
$
|
1.90
|
|
|
|
37.9
|
%
|
Other
operating revenue.
Other operating revenue was $24,879 for the six months ended September 30, 2017 compared to $168,458 for
the six months ended September 30, 2016 primarily due to the settlement of a lawsuit for underpayment of royalties received last
year from Chesapeake Energy Corporation and Total E&P USA in the amount of $148,614.
Production
and exploration.
Production costs were $564,705 for the six months ended September 30, 2017, a 16% increase from $487,492
for the six months ended September 30, 2016. This increase is primarily the result of XTO Energy, Inc. incorrectly providing us
a refund for marketing and transportation fees of approximately $67,000 which is being reversed via netting over the next 8-10
months.
Depreciation,
depletion and amortization.
Depreciation, depletion and amortization expense was $596,765 for the six months ended September
30, 2017, a 1.5% decrease from $605,752 for the six months ended September 30, 2016, due to an increase in oil and gas reserves
and a decrease in gas production partially offset by an increase in future development costs.
General
and administrative expenses.
General and administrative expenses were $539,528 for the six months ended September 30, 2017,
a 7% decrease from $580,613 for the six months ended September 30, 2016. This was primarily due to a decrease in engineering and
consulting services, insurance expenses and legal fees partially offset by an increase in accounting fees.
Interest
expense.
Interest expense was $53,950 for the six months ended September 30, 2017, a 41% decrease from $91,007 for the same
period fiscal 2017 due to an increase in interest rate partially offset by a decrease in borrowings.
Income
taxes.
There was no income tax expense for the six months ended September 30, 2017 and for the six months ended September
30, 2016. The effective tax rate for the six months ended September 30, 2017 and September 30, 2016 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.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
The
primary sources of market risk for us include fluctuations in commodity prices and interest rates. All of our financial instruments
are for purposes other than trading.
Interest
Rate Risk.
At September 30, 2017, we had an outstanding loan balance of $2,468,000 under our revolving credit agreement, which
bears interest at an annual rate equal to the BBA LIBOR daily floating rate, plus 3.0 percentage points. If the interest rate
on our bank debt increases or decreases by one percentage point our annual pretax income would change by $24,680 based on the
outstanding balance at September 30, 2017.
Credit
Risk.
Credit risk is the risk of loss as a result of nonperformance by other parties of their contractual obligations. Our
primary credit risk is related to oil and gas production sold to various purchasers and the receivables are generally not collateralized.
At September 30, 2017, our largest credit risk associated with any single purchaser was $111,802 or 36% of our total oil and gas
receivables. We are also exposed to credit risk in the event of nonperformance from any of our working interest partners. At September
30, 2017, our largest credit risk associated with any working interest co-owner was $6,947 or 40% of our total trade receivable.
We have not experienced any significant credit losses.
Energy
Price Risk
. Our most significant market risk is the pricing for natural gas and crude oil. Our financial condition, results
of operations, and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil and natural
gas. Prices for oil and natural gas fluctuate widely. We cannot predict future oil and natural gas prices with any certainty.
Historically, the markets for oil and gas have been volatile, and they are likely to continue to be volatile.
Factors
that can cause price fluctuations include the level of global demand for petroleum products, foreign supply of oil and gas, the
establishment of and compliance with production quotas by oil-exporting countries, weather conditions, the price and availability
of alternative fuels and overall political and economic conditions in oil producing countries.
Declines
in oil and natural gas prices will materially adversely affect our financial condition, liquidity, ability to obtain financing
and operating results. Changes in oil and gas prices impact both estimated future net revenue and the estimated quantity of proved
reserves. Any reduction in reserves, including reductions due to price fluctuations, can reduce the borrowing base under our revolving
credit facility and adversely affect the amount of cash flow available for capital expenditures and our ability to obtain additional
capital for our acquisition, exploration and development activities. In addition, a noncash write-down of our oil and gas properties
could be required under full cost accounting rules if prices declined significantly, even if it is only for a short period of
time. Lower prices may also reduce the amount of crude oil and natural gas that can be produced economically. Thus, we may experience
material increases or decreases in reserve quantities solely as a result of price changes and not as a result of drilling or well
performance.
Similarly,
any improvements in oil and gas prices can have a favorable impact on our financial condition, results of operations and capital
resources. Oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. Our financial results
are more sensitive to movements in oil prices than gas prices because most of our production is oil. If the average oil price
had increased or decreased by ten dollars per barrel for the first six months of fiscal 2018, our pretax loss would have changed
by $179,690. If the average gas price had increased or decreased by one dollar per mcf for the first six months of fiscal 2018,
our pretax loss would have changed by $179,016.