UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from to
Commission
File No.
(Exact name of registrant as specified in its charter)
| (State
or other jurisdiction of incorporation or organization) |
(IRS
Employer Identification Number) |
| (Address of principal executive offices) | (Zip code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. ☒ NO ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated Filer ☐ | ||
| Smaller
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| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐
The number of shares outstanding of the registrant’s common stock, par value $.50 per share, as of February 8, 2024 was .
MEXCO ENERGY CORPORATION AND SUBSIDIARIES
Table of Contents
| 2 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
| December 31, | March 31, | |||||||
| 2023 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable: | ||||||||
| Oil and natural gas sales | ||||||||
| Trade | ||||||||
| Prepaid costs and expenses | ||||||||
| Prepaid drilling | ||||||||
| Total current assets | ||||||||
| Property and equipment, at cost | ||||||||
| Oil and gas properties, using the full cost method | ||||||||
| Other | ||||||||
| Accumulated depreciation, depletion and amortization | ( | ) | ( | ) | ||||
| Property and equipment, net | ||||||||
| Investments – cost basis | ||||||||
| Operating lease, right-of-use asset | ||||||||
| Other noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Operating lease liability, current | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Operating lease liability, long-term | ||||||||
| Asset retirement obligations | ||||||||
| Deferred income tax liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock - $ par value; shares authorized; outstanding | ||||||||
| Common stock - $ par value; shares authorized; and shares issued; and shares outstanding as of December 31, 2023 and March 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Treasury stock, at cost ( and shares, respectively) | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
| 3 |
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| December 31 | December 31 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating revenue: | ||||||||||||||||
| Oil sales | $ | $ | $ | $ | ||||||||||||
| Natural gas sales | ||||||||||||||||
| Other | ||||||||||||||||
| Total operating revenues | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Production | ||||||||||||||||
| Accretion of asset retirement obligation | ||||||||||||||||
| Depreciation, depletion, and amortization | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income | ||||||||||||||||
| Other income (expenses): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net other income (expense) | ( | ) | ( | ) | ||||||||||||
| Income before provision for income taxes | ||||||||||||||||
| Income tax expense: | ||||||||||||||||
| Current | ||||||||||||||||
| Deferred | ||||||||||||||||
| Total income tax expense | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Income per common share: | ||||||||||||||||
| Basic: | $ | $ | $ | $ | ||||||||||||
| Diluted: | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic: | ||||||||||||||||
| Diluted: | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
| 4 |
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Common
Stock Par Value | Additional
Paid-In Capital | Retained Earnings | Treasury Stock | Total
Stockholders’ Equity | ||||||||||||||||
| Balance at April 1, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net income | ||||||||||||||||||||
| Dividends paid | ( | ) | ( | ) | ||||||||||||||||
| Issuance of stock through options exercised | ||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net income | ||||||||||||||||||||
| Purchase of stock | ( | ) | ( | ) | ||||||||||||||||
| Stock based compensation | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net income | ||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||
| Purchase of stock | ( | ) | ( | ) | ||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Common Stock Par Value | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Total Stockholders’ | ||||||||||||||||
| Balance at April 1, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net income | ||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net income | ||||||||||||||||||||
| Profit from purchase of stock by insider | ||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Net income | ||||||||||||||||||||
| Issuance of stock through options exercised | ||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||
| Purchase of stock | ( | ) | ( | ) | ||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| SHARE ACTIVITY | ||||||||||||||||||||
| Common stock shares, issued: | ||||||||||||||||||||
| Balance at April 1, 2023 | ||||||||||||||||||||
| Issued | ||||||||||||||||||||
| Balance at Dec. 31, 2023 | ||||||||||||||||||||
| Common stock shares, held in treasury: | ||||||||||||||||||||
| Balance at April 1, 2023 | ( | ) | ||||||||||||||||||
| Acquisitions | ( | ) | ||||||||||||||||||
| Balance at Dec. 31, 2023 | ( | ) | ||||||||||||||||||
| Common stock shares, outstanding at December 31, 2023 |
The accompanying notes are an integral part of the consolidated financial statements.
| 5 |
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended December 31,
(Unaudited)
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Deferred income tax expense | ||||||||
| Stock-based compensation | ||||||||
| Depreciation, depletion and amortization | ||||||||
| Accretion of asset retirement obligations | ||||||||
| Amortization of debt issuance costs | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (increase) in accounts receivable | ( | ) | ||||||
| Decrease in right-of-use asset | ||||||||
| Decrease in prepaid expenses | ||||||||
| Increase (decrease) in accounts payable and accrued expenses | ( | ) | ||||||
| Settlement of asset retirement obligations | ( | ) | ( | ) | ||||
| Decrease in operating lease liability | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Additions to oil and gas properties | ( | ) | ( | ) | ||||
| Additions to other property and equipment | ( | ) | ||||||
| Drilling refunds | ||||||||
| Investment in limited liability companies at cost | ( | ) | ( | ) | ||||
| Proceeds from sale of oil and gas properties and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Profits from purchase of stock by insider | ||||||||
| Debt issuance costs | ( | ) | ||||||
| Proceeds from long-term debt | ||||||||
| Reduction of long-term debt | ( | ) | ||||||
| Dividends paid | ( | ) | ||||||
| Acquisition of treasury stock | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Asset retirement obligations | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
| 6 |
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 acquisition, exploration, development and production of crude oil, natural gas, condensate and natural gas liquids (“NGLs”). Most of the Company’s oil and gas interests are centered in West Texas and Southeastern New Mexico; however, the Company owns producing properties and undeveloped acreage in fourteen states. All of the Company’s oil and gas interests are operated by others.
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 (“GAAP”), 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 December 31, 2023, and the results of its operations and cash flows for the interim periods ended December 31, 2023 and 2022. The consolidated financial statements as of December 31, 2023 and for the three and nine month periods ended December 31, 2023 and 2022 are unaudited. The consolidated balance sheet as of March 31, 2023 was derived from the audited balance sheet filed in the Company’s 2023 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.
Investments.
Reclassifications. Certain amounts in prior periods’ consolidated financial statements have been reclassified to conform with the current period’s presentation. These reclassifications had no effect on previously reported results of operations, retained earnings or net cash flows.
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 until the liability is settled or the well is sold, at which time the liability is removed. The related asset retirement cost is capitalized as part of the carrying amount of our oil and natural gas properties. The ARO is included in the consolidated balance sheets with the current portion being included in the accounts payable and other accrued expenses.
| 7 |
The following table provides a rollforward of the AROs for the first nine months of fiscal 2024:
| Carrying amount of asset retirement obligations as of April 1, 2023 | $ | |||
| Liabilities incurred | ||||
| Liabilities settled | ( | ) | ||
| Accretion expense | ||||
| Carrying amount of asset retirement obligations as of December 31, 2023 | ||||
| Less: Current portion | ||||
| Non-Current asset retirement obligation | $ |
The Company recognized stock-based compensation expense of $ and $ in general and administrative expense in the Consolidated Statements of Operations for the three months ended December 31, 2023 and 2022, respectively. Stock-based compensation expense recognized for the nine months ended December 31, 2023 and 2022 was $ and $, respectively. The total cost related to non-vested awards not yet recognized at December 31, 2023 totals $ which is expected to be recognized over a weighted average of years.
During
the nine months ended December 31, 2023, the Compensation Committee of the Board of Directors approved and the Company granted
stock options exercisable at $
| Nine Months Ended | ||||||||
| December 31 | ||||||||
| 2023 | 2022 | |||||||
| Grant-date fair value | $ | $ | ||||||
| Volatility factor | % | % | ||||||
| Dividend yield | ||||||||
| Risk-free interest rate | % | % | ||||||
| Expected term (in years) | ||||||||
| Number
of Shares | Weighted
Average Exercise Price | Weighted
Average Remaining Contract Life in Years | Intrinsic Value | |||||||||||||
| Outstanding at April 1, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited or Expired | ||||||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Vested at December 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at December 31, 2023 | $ | $ | ||||||||||||||
| 8 |
During
the nine months ended December 31, 2023, stock options covering shares were exercised with a total intrinsic value of $. The
Company received proceeds of $
There were stock options forfeited or expired during the nine months ended December 31, 2023 and 2022. No forfeiture rate is assumed for stock options granted to directors or employees due to the forfeiture rate history of these types of awards.
Outstanding options at December 31, 2023 expire between and and have exercise prices ranging from $ to $.
5. Long Term Debt
On
December 28, 2018, the Company entered into a loan agreement (the “Agreement”) with West Texas National Bank (“WTNB”),
which originally provided for a credit facility of $
On
February 28, 2020, the Agreement was amended to increase the credit facility to $
Under
the Agreement, interest on the facility accrues at a rate equal to the prime rate as quoted in the Wall Street Journal plus one-half
of one percent (
No
principal payments are anticipated to be required through the maturity date of the credit facility,
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.
In addition, this Agreement prohibits the Company from paying cash dividends on its common stock without written permission of WTNB. The Company obtained written permission from WTNB prior to declaring the special dividend on April 10, 2023 as discussed in Note 10. The Agreement does not permit the Company to enter into hedge agreements covering crude oil and natural gas prices without prior WTNB approval.
There
was
6. Leases
The
Company leases approximately
| 9 |
The Company determines an arrangement is a lease at inception. Operating leases are recorded in operating lease right-of-use asset, operating lease liability, current, and operating lease liability, long-term on the consolidated balance sheets.
Operating
lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent
its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement
date based on the present value of lease payments over the lease term. As the Company’s lease does not provide an implicit rate,
the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value
of lease payments. The incremental borrowing rate used at adoption was
The balance sheets classification of lease assets and liabilities was as follows:
| December 31, 2023 | ||||
| Assets | ||||
| Operating lease right-of-use asset, beginning balance | $ | |||
| Current period amortization | ( | ) | ||
| Total operating lease right-of-use asset | $ | |||
| Liabilities | ||||
| Operating lease liability, current | $ | |||
| Operating lease liability, long term | ||||
| Total lease liabilities | $ | |||
Future minimum lease payments as of December 31, 2023 under non-cancellable operating leases are as follows:
| Lease Obligation | ||||
| Fiscal Year Ended March 31, 2024 | ||||
| Fiscal Year Ended March 31, 2025 | ||||
| Total lease payments | $ | |||
| Less: imputed interest | ( | ) | ||
| Operating lease liability | ||||
| Less: operating lease liability, current | ( | ) | ||
| Operating lease liability, long term | $ | |||
Net
cash paid for our operating lease for the nine months ended December 31, 2023 and 2022 was $
7. Income Taxes
On
August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA 2022”).
The income tax provision consists of the following for the nine months ended December 31, 2023 and 2022:
| Nine Months Ended | ||||||||
| December 31 | ||||||||
| 2023 | 2022 | |||||||
| Current income tax expense: | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Total current income tax expense | ||||||||
| Deferred income tax expense: | ||||||||
| Federal | ||||||||
| State | ||||||||
| Total deferred income tax expense | ||||||||
| Total income tax expense: | $ | $ | ||||||
| 10 |
Federal
income tax for the nine months ended December 31, 2023 was $
A reconciliation of the provision for income taxes to income taxes computed using the federal statutory rate for the nine months ended December 31 follows:
| 2023 | 2022 | |||||||
| Tax expense at federal statutory rate (1) | $ | $ | ||||||
| Statutory depletion carryforward | ( | ) | ( | ) | ||||
| Change in valuation allowance | ( | ) | ( | ) | ||||
| Permanent differences | ||||||||
| State income expense | ||||||||
| Other | ||||||||
| Total income tax | $ | $ | ||||||
| Effective income tax rate | % | % | ||||||
| (1) |
8. Related Party Transactions
Related
party transactions for the Company primarily 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 December
31, 2023 and 2022 was $
| Three Months Ended | Nine Months Ended | |||||||||||||||
| December 31 | December 31 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Shares outstanding: | ||||||||||||||||
| Weighted avg. shares outstanding – basic | ||||||||||||||||
| Effect of assumed exercise of dilutive stock options | ||||||||||||||||
| Weighted avg. shares outstanding – dilutive | ||||||||||||||||
| Income per common share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
For
the three and nine months ended December 31, 2023, shares relating to stock options were excluded from the computation of diluted
net income because their inclusion would be anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $
| 11 |
10. Stockholders’ Equity
In
March 2023, the Board of Directors authorized the use of up to $
On
August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA 2022”). The IRA 2022, among other
tax provisions, establishes a
During
the nine months ended December 31, 2023, the Company repurchased shares for the treasury at an aggregate cost of $
On
April 10, 2023, the Board of Directors declared a special dividend of $ per common share. The Company paid the special dividend of
$
Dividends declared by the Board and stock repurchased during the period are presented in the Company’s consolidated statements of changes in stockholders’ equity as dividends paid and purchases of treasury stock, respectively. Dividends paid and stock repurchased during the period are presented as cash used in financing activities in the Company’s consolidated statements of cash flows. Stock repurchases are included as treasury stock in the consolidated balance sheets.
11. Subsequent Events
In
February 2024, Mexco expended approximately $
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 other subsequent events to be disclosed.
| 12 |
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 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, 2023, we had working capital of $4,297,176 compared to working capital of $3,475,776 at March 31, 2023, an increase of $821,400 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 Nine Months Ended December 31, | ||||||||||||
| 2023 | 2022 | Change | ||||||||||
| Net cash provided by operating activities | 3,374,717 | 4,350,920 | (976,203 | ) | ||||||||
| Net cash used in investing activities | (1,365,030 | ) | (4,969,269 | ) | (3,604,239 | ) | ||||||
| Net cash used in financing activities | (666,520 | ) | (121,381 | ) | 545,139 | |||||||
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, 2023 was $3,374,717 in comparison to $4,350,920 for the nine months ended December 31, 2022. This decrease of $976,203 in our cash flow operating activities consisted of an increase in our non-cash expenses of $384,803; a decrease in our accounts receivable of $1,192,691; an increase of $113,278 of our accounts payable and accrued expenses; and, a decrease in our net income for the current nine months of $2,674,516. 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, 2023, we had net cash of $1,365,030 used for additions to oil and gas properties compared to $4,969,269 for the nine months ended December 31, 2022.
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 $666,520 for the nine months ended December 31, 2023 compared to cash flow used in our financing activities of $121,381 for the nine months ended December 31, 2022. During the nine months ended December 31, 2023, we expended $213,600 to pay the special dividend and $455,132 to purchase 37,161 shares of our stock for the treasury account.
Accordingly, net cash increased $1,343,167, leaving cash and cash equivalents on hand of $3,578,938 as of December 31, 2023.
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Oil and Natural Gas Property Development.
New Participations in Fiscal 2024. The Company currently plans to participate in the drilling and completion of 48 horizontal wells and 1 vertical well at an estimated aggregate cost of approximately $2,200,000 for the fiscal year ending March 31, 2024. Forty-five 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. The remaining 3 horizontal wells are in the Bakken formation in McKenzie County, north Dakota and the vertical well is in Irion County, Texax.
During the first nine months of fiscal 2024, Mexco expended approximately $264,000 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%. Two of these wells began producing in November 2023 with initial average production rates of 1,066 barrels of oil, 4,393 barrels of water and 2,483,000 cubic feet of gas per day, or 1,480 barrels of oil equivalent (“BOE”) per day.
During the first nine months of fiscal 2024, Mexco expended approximately $152,000 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 .4%. These wells began producing in November 2023 with initial average production rates of 837 barrels of oil, 1,794 barrels of water and 659,000 cubic feet of gas per day, or 947 BOE per day.
During the first nine months of fiscal 2024, Mexco expended approximately $105,000 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 approximately ..285%. These wells began producing in September 2023 with initial average production rates of 582 barrels of oil, 1,488 barrels of water and 791,000 cubic feet of gas per day, or 714 BOE per day.
In July 2023, Mexco expended approximately $787,000 to participate in the drilling of five horizontal wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico. Mexco’s working interest in these wells is approximately 2.2%.
In July 2023, Mexco expended approximately $36,000 to participate in the drilling and completion of two horizontal wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico. Mexco’s working interest in these wells is approximately .1%. One of these wells began producing in September 2023 with initial average production rates of 747 barrels of oil, 1,933 barrels of water and 433,000 cubic feet of gas per day, or 819 BOE per day.
In November 2023, Mexco expended approximately $32,000 to participate in the drilling and completion of one horizontal well in the Penn Shale formation of the Delaware Basin in Lea County, New Mexico. Mexco’s working interest in this well is .16%.
In October 2022, the Company made an approximately 2% equity investment commitment in a limited liability company amounting to $2,000,000 of which $600,000 has been funded as of December 31, 2023. Subsequently, in February 2024, the Company funded another $200,000 toward this investment. 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. To date, this LLC has returned $58,022 or 7% of the total investment.
In April 2019, the Company invested over a period of four years $300,000 for a less than 1% investment commitment in a limited liability company to purchase mineral interests in the Utica and Marcellus areas of Ohio. To date, this LLC has returned $263,756 or 88% of the total investment.
Completion of Wells Drilled in Fiscal 2023. The Company expended approximately $450,000 in the completion of 21 horizontal wells in which the Company participated in fiscal 2023.
The Company expended approximately $427,000 for the completion costs of eight horizontal wells in the Wolfcamp Sand formation of the Delaware Basin in Lea County, New Mexico that the Company participated in drilling during fiscal 2023. Mexco’s working interest in these wells is .52%. These wells began producing in October 2023 with initial average production rates of 825 barrels of oil, 3,540 barrels of water and 2,150,000 cubic feet of gas per day, or, 1,183 BOE per day.
Three horizontal wells in the Bone Spring formation of the Delaware Basin in Eddy County, New Mexico in which the Company participated during fiscal 2023 were completed in May 2023 with initial average production rates of 437 barrels of oil, 983 barrels of water and 603,000 cubic feet of gas per day, or, 538 barrels of oil equivalent per day. Mexco’s working interest in these wells is .05%.
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In October 2023, six of seven horizontal wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico in which the Company participated during fiscal 2023 were completed with initial average production rates of 1,991 barrels of oil, 2,134 barrels of water and 2,414,000 cubic feet of gas per day, or, 2,393 barrels of oil equivalent per day. Mexco’s working interest in these wells is .033%.
Acquisitions. In December 2023, the Company acquired royalty (mineral) interests in 8 wells operated by Occidental Petroleum Corporation and located in Reeves County, Texas for a purchase price of $364,000 which is effective November 1, 2023. Subsequently, in January 2024, the Company acquired an additional interest in these same wells for a purchase price of $91,000, effective December 1, 2023.
In November 2023, the Company acquired small royalty (mineral) interests in 13 wells operated by Diamondback Energy, Inc. and located in Midland County, Texas for a purchase price of $45,300 which is effective November 1, 2023.
In November 2023, the Company acquired small producing and non-producing royalty (mineral) interests in 1,280 gross acres in Crane, Ector, Midland and Upton Counties, Texas for a purchase price of $60,500 which is October 1, 2023.
In June 2023, the Company acquired small royalty (mineral) interests in 6 wells operated by Highpeak Energy and located in Howard County, Texas for a purchase price of $20,000 which is effective July 1, 2023.
Sales of Properties. During the first quarter of fiscal 2024, the Company received approximately $280,000 in cash from a sale of joint venture leasehold acreage and marginal producing working interest wells in Reagan County, Texas, marginal producing working interest wells in Pecos County, Texas and interest in surface acreage in Palo Pinto County, Texas.
In December 2023, the Company made on a 3-year Term Assignment of 98% of the Company’s leasehold interest in certain deep rights of 200 acres in Loving and Ward Counties, Texas. The Company received $5,000 per net leasehold acre in the total amount of approximately $980,000. The Company retained the remaining 2% leasehold interest as a participating interest in the full unit at approximately .625% working interest. The Company also retained an overriding royalty interest of 5% proportionately reduced.
Also in December 2023, the Company made on a 3-year Term Assignment of the Company’s leasehold interest in 12.96 net mineral acres located in Lea County, New Mexico. The Company received $2,500 per net leasehold acre in the total amount of $32,400. The Company retained an overriding royalty interest equal to the positive difference between 25% and any existing burdens of record as of the effective date.
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 $62.72 per bbl in March 2023 to a high of $89.66 per bbl in September 2023. The Henry Hub Spot Market Price (“Henry Hub”) posted price for natural gas has ranged from a low of $1.74 per MMBtu in June 2023 to a high of $3.78 per MMBtu in January 2023.
On December 31, 2023, the WTI posted price for crude oil was $67.63 and the Henry Hub posted price for natural gas was $2.58. See Results of Operations below for realized price.
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, 2023:
| Payments due in: | ||||||||||||||||
| Total | less than 1 year | 1 - 3 years | over 3 years | |||||||||||||
| Contractual obligations: | ||||||||||||||||
| Leases (1) | $ | 33,973 | $ | 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 $9,084 less than 1 year for his portion of the shared office space. |
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Results of Operations – Three Months Ended December 31, 2023 and 2022. For the quarter ended December 31, 2023, there was net income of $345,610 compared to $1,244,785 for the quarter ended December 31, 2022 as a result of a decrease in operating revenues due to a decrease in oil and gas prices and production partially offset by a decrease in operating expenses that is further explained below.
Oil and gas sales. Revenue from oil and gas sales was $1,610,595 for the third quarter of fiscal 2024, a 35% decrease from $2,486,017 for the same period of fiscal 2023. This resulted from a decrease in oil and natural gas production volumes and a decrease in oil and natural gas prices.
| 2023 | 2022 | % Difference | ||||||||||
| Oil: | ||||||||||||
| Revenue | $ | 1,387,008 | $ | 1,750,539 | (20.8 | %) | ||||||
| Volume (bbls) | 17,636 | 21,308 | (17.2 | %) | ||||||||
| Average Price (per bbl) | $ | 78.65 | $ | 82.15 | (4.3 | %) | ||||||
| Gas: | ||||||||||||
| Revenue | $ | 223,587 | $ | 735,478 | (69.6 | %) | ||||||
| Volume (mcf) | 122,794 | 145,980 | (15.9 | %) | ||||||||
| Average Price (per mcf) | $ | 1.82 | $ | 5.04 | (63.9 | %) | ||||||
Production and exploration. Production costs were $401,035 for the third quarter of fiscal 2024, a 16% decrease from $478,670 for the same period of fiscal 2023. This is primarily the result of a decrease in production taxes and marketing charges as a result of the decrease in oil and gas revenues.
Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $400,337 for the third quarter of fiscal 2024, a 19% decrease from $496,509 for the same period of fiscal 2023, primarily due to a decrease in production and full cost pool amortization base.
General and administrative expenses. General and administrative expenses were $335,153 for the third quarter of fiscal 2024, a 16% increase from $288,536 for the same period of fiscal 2023. This was primarily due to an increase in accounting fees and employee stock option compensation.
Income taxes. Federal income tax for the three months ended December 31, 2023 was $169,986. There was no federal income tax expense for the three months ended December 31, 2022 because the Company was in a net deferred tax asset position. State income tax was $32,959 for the three months ended December 31, 2023, a 47% decrease from $61,986 for the three months ended December 31, 2022 due to the decrease in oil and natural gas sales in the State of New Mexico. The effective tax rate for state and federal taxes combined for the three months ended December 31, 2023 and 2022 was 37% and 5%, respectively. The increase in the effective federal tax rate is the result of the reconciliation to the federal tax return.
Results of Operations – Nine Months Ended December 31, 2023 and 2022. For the nine months ended December 31, 2023, there was a net income of $1,080,657 compared to net income of $3,755,173 for the nine months ended December 31, 2022. This was a result of a decrease in operating revenues due to a decrease in oil and gas prices and a decrease in gas production partially offset by an increase in oil production and a decrease in operating expenses that is further explained below.
Oil and gas sales. Revenue from oil and gas sales was $4,706,395 for the nine months ended December 31, 2023, a 35% decrease from $7,184,025 for the same period of fiscal 2023. This resulted from a decrease in oil and natural gas prices and a decrease in natural gas production partially offset by an increase in oil production.
| 2023 | 2022 | % Difference | ||||||||||
| Oil: | ||||||||||||
| Revenue | $ | 3,916,792 | $ | 4,707,735 | (16.8 | %) | ||||||
| Volume (bbls) | 50,826 | 50,052 | 1.5 | % | ||||||||
| Average Price (per bbl) | $ | 77.06 | $ | 94.06 | (18.1 | %) | ||||||
| Gas: | ||||||||||||
| Revenue | $ | 789,903 | $ | 2,476,290 | (68.1 | %) | ||||||
| Volume (mcf) | 372,459 | 394,293 | (5.5 | %) | ||||||||
| Average Price (per mcf) | $ | 2.12 | $ | 6.28 | (66.2 | %) | ||||||
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Production and exploration. Production costs were $1,143,116 for the nine months ended December 31, 2023, a 13% decrease from $1,308,143 for the nine months ended December 31, 2022. This decrease is primarily the result of a decrease in production taxes and marketing charges as a result of the decrease in oil and gas revenues.
Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $1,268,703 for the nine months ended December 31, 2023, a .1% increase from $1,268,016 for the nine months ended December 31, 2022, due to a decrease in oil and gas reserves and an increase in oil production partially offset by a decrease in gas production and the full cost amortization base.
General and administrative expenses. General and administrative expenses were $981,665 for the nine months ended December 31, 2023, a 12% increase from $876,735 for the nine months ended December 31, 2022. This was primarily due to an increase in employee stock option compensation, accounting fees and engineering services partially offset by a decrease in legal fees.
Income taxes. Federal income tax for the nine months ended December 31, 2023 was $319,848. There was no federal income tax expense for the nine months ended December 31, 2022 because the Company was in a net deferred tax asset position. State income tax was $79,123 for the nine months ended December 31, 2023, a 31% decrease from $115,236 for the nine months ended December 31, 2022 due to the decrease in oil and natural gas sales in the State of New Mexico. The effective tax rate for state and federal taxes combined for the nine months ended December 31, 2023 and 2022 was 27% and 3%, respectively. The increase in the effective federal tax rate is the result of the reconciliation to the federal tax return.
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.
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 December 31, 2023, our largest credit risk associated with any single purchaser was $565,161 or 62% of our total oil and gas receivables. We have not experienced any significant credit losses.
Energy Price Risk. Our most significant market risk is the pricing applicable to our crude oil and natural gas production. 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 production has been volatile and unpredictable for several years, and we expect this volatility to continue in the future.
Factors that can cause price fluctuations include the level of global demand for petroleum products, foreign and domestic 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 and consuming countries.
For example, in the last twelve months, the NYMEX West Texas Intermediate (“WTI”) posted price for crude oil has ranged from a low of $62.72 per bbl in March 2023 to a high of $89.66 per bbl in September 2023. The Henry Hub Spot Market Price (“Henry Hub”) posted price for natural gas has ranged from a low of $1.74 per MMBtu in June 2023 to a high of $3.78 per MMBtu in January 2023. On December 31, 2023, the WTI posted price for crude oil was $67.63 and the Henry Hub posted price for natural gas was $2.58. See Results of Operations above for the Company’s realized prices during the three and nine months. Subsequently, on January 30, 2024, the WTI posted price for crude oil was $73.80 and the Henry Hub posted price for natural gas was $2.26.
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 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. If the average oil price had increased or decreased by ten dollars per barrel for the first nine months of fiscal 2024, our operating revenues would have increased or decreased $508,260. If the average gas price had increased or decreased by one dollar per mcf for the first nine months of fiscal 2024, our operating revenues would have increased or decreased $372,459.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis. At the end of the period covered by this report, our principal executive officer and principal financial officer reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e). Based on such evaluation, such officers concluded that, as of December 31, 2023, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting. No changes in our internal control over financial reporting occurred during the nine months ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. We are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under various environmental protection statutes or other regulations to which we are subject.
Item 1A.Risk Factors
There have been no material changes to the information previously disclosed in Item 1A. “Risk Factors” in our 2023 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
c. Issuer Purchases of Equity Securities
In March 2023, our board of directors authorized the use of up to $1,000,000 to repurchase shares of our common stock for the treasury account. This program does not have an expiration date and may be modified, suspended or terminated at any time by the board of directors. The following table provides information related to repurchases of our common stock for the treasury account during the nine months ended December 31, 2023:
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (1) | |||||||||||||
| April 1-30, 2023 | - | - | - | $ | 1,000,000 | |||||||||||
| May 1-31, 2023 | - | - | - | $ | 1,000,000 | |||||||||||
| June 1-30, 2023 | - | - | - | $ | 1,000,000 | |||||||||||
| July 1-31, 2023 | 9,500 | $ | 12.28 | 9,500 | $ | 883,293 | ||||||||||
| August 1-31, 2023 | 9,500 | $ | 12.69 | 9,500 | $ | 762,743 | ||||||||||
| September 1-30, 2023 | 7,000 | $ | 12.57 | 7,000 | $ | 674,744 | ||||||||||
| October 1-31, 2023 | 6,000 | $ | 12.58 | 6,000 | $ | 599,267 | ||||||||||
| November 1-30, 2023 | 1,839 | $ | 11.49 | 1,839 | $ | 578,141 | ||||||||||
| December 1-31, 2023 | 3,322 | $ | 10.02 | 3,322 | $ | 544,868 | ||||||||||
| (1) | The program authorizing the use of up to $1,000,000 to repurchase shares of our common stock for the treasury account was approved by the board of directors on March 27, 2023 and does not have an expiration date. As of December 31, 2023, 37,161 shares of Mexco’s common stock have been purchased for a total of $455,132. |
Item 6. Exhibits
| 31.1 | Certification of the Chief Executive Officer of Mexco Energy Corporation | |
| 31.2 | Certification of the Chief Financial Officer of Mexco Energy Corporation | |
| 32.1 | Certification of the Chief Executive Officer and Chief Financial Officer of Mexco Energy Corporation pursuant to 18 U.S.C. §1350 | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extenstion Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MEXCO ENERGY CORPORATION | |
| (Registrant) | |
| Dated: February 9, 2024 | /s/ Nicholas C. Taylor |
| Nicholas C. Taylor | |
| Chairman of the Board and Chief Executive Officer | |
| Dated: February 9, 2024 | /s/ Tamala L. McComic |
| Tamala L. McComic | |
| President, Chief Financial Officer, Treasurer and Assistant Secretary |
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