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MXC > SEC Filings for MXC > Form 10-Q on 14-Feb-2012All Recent SEC Filings

Show all filings for MEXCO ENERGY CORP

Form 10-Q for MEXCO ENERGY CORP


14-Feb-2012

Quarterly Report


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 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.

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 in areas with significant development potential.

For the first nine months of fiscal 2012, cash flow from operations was $1,000,832, a 10% increase when compared to the corresponding period of fiscal 2011. Cash of $627,562 was used for additions to oil and gas properties, $1,050,000 was used to reduce long term debt and $470,729 was received primarily from the sale of a term leasehold interest in oil and gas properties. Accordingly, net cash decreased $103,901. This decrease in cash can be primarily attributed to the use of cash for debt reduction.

In March 2011, we purchased working interests in 160 gross acres five (5) wells in the Fuhrman-Mascho Field of Andrews County, Texas, for an approximate cash purchase price of $670,000 funded from our $4.9 million credit facility. This acreage now contains seven (7) wells - four producing oil from the San Andres formation and three (3) producing oil from the Grayburg and San Andres formations at an approximate depth of 5,000 feet. All seven (7) of these wells are operated by Cone and Petree Oil & Gas Exploration, Inc. The Company owns working interests of approximately 10% (7.2% net revenue interest) in this property. This property contains an additional 9 potential drill sites in the Grayburg and San Andres formations with more dense spacing of approximately 10 acres per well. This new spacing in the Fuhrman-Mascho Field has been shown to increase production.

In June 2011, we received $450,000 in cash from Energen Corporation (NYSE:EGN) for the assignment of a five year term leasehold interest in 200 acres at $2,250 per acre. The assignment covers depths of 7,680' to 11,500' feet from the surface. Mexco retained a royalty of 8.33%. This interest has potential for oil production from the Avalon and Bone Springs in separate intervals by horizontal drilling above the prolific Vermejo Fusselman Gas Field of Loving County, Texas.

During the first nine months of fiscal 2012, we participated in 37 infill wells in the Yeso/Paddock formations of the Dodd-Federal Unit in the Grayburg San Andres Jackson Field of Eddy County, New Mexico. These wells are proposed to be drilled in the next twelve months to a total depth of approximately 5,000 feet. The unit, operated by Concho Resources, Inc. (NYSE:CXO), currently contains approximately 110 producing wells. Mexco's working interest in this unit is .1848% (.14% net revenue interest).


During the first nine months of fiscal 2012, a joint venture in which we are a working interest partner drilled two (2) infill wells in the Strawn formation on a 160 acre tract in Andrews County, Texas. The section in which this tract is located currently contains 12 completed wells on 40-acre spacing. Our share of the costs to drill and complete these wells through December 2011 for our approximately 1% working interest was approximately $64,000.

During the first nine months of fiscal 2012, a joint venture in which we are a working interest partner drilled two (2) infill wells in the Strawn formation on a 160 acre tract in Glasscock County, Texas. The immediate offsetting sections in which this tract is located currently contains 14 completed wells. Our share of the costs to drill and complete these wells through December 2011 for our approximately 1% working interest was approximately $62,000.

During the third quarter of fiscal 2012, a joint venture in which we are a working interest partner began drilling one (1) of two (2) development wells in the Delaware and Bone Spring Sand formations on a 160 acre tract in Eddy County, New Mexico which currently contains four (4) producing wells. Our share of the costs to drill and complete the first of these wells through December 2011 for our approximately 1% working interest was approximately $13,000.

Also, during the third quarter of fiscal 2012, two joint ventures in which we are a working interest partner began drilling three (3) development wells in Lea County, New Mexico. One well is on a 560 acre tract and is to be completed in the Abo formation. The other two wells are on a 640 acre tract which contains six wells currently producing and are to be completed in Bone Spring Sand formation. Our share of the costs to drill and complete these wells through December 2011 for our approximately 1% working interest was approximately $90,000.

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 Mexco common stock.

On June 29, 2011, our board of directors authorized the use of up to $250,000 to repurchase shares of our common stock for the treasury account. During the nine months ended December 31, 2011, we repurchased 4,000 shares for the treasury at an aggregate cost of $22,780.

At December 31, 2011, we had working capital of approximately $362,844 compared to working capital of $470,253 at March 31, 2011, a decrease of $107,409. This was mainly the result of a reduction in long term debt and a decrease in accounts payable and accrued expenses partially offset by a decrease in accounts receivable.

Crude oil and natural gas prices have fluctuated significantly in recent years. The effect of declining product prices on our business is significant. 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 West Texas Intermediate ("WTI") posted price for crude oil has ranged from a low of $71.50 per bbl in October 2011 to a high of $110.00 per bbl in April 2011. The Henry Hub Spot Market Price ("Henry Hub") for natural gas has ranged from a low of $2.84 per MMBtu in November 2011 to a high of $4.92 per MMBtu in June 2011. On December 30, 2011 the WTI posted price for crude oil was $94.75 per bbl and the Henry Hub spot price for natural gas was $2.98 per MMBtu. Management is of the opinion that cash flow from operations and funds available from financing will be sufficient to provide adequate liquidity for the next fiscal year.

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, 2011:

                                                  Payments Due In (1):
                                Total       less than 1 year      1-3 years       3 years
Contractual obligations:
Secured bank line of credit   $ 750,000     $               -     $  750,000     $       -

(1) Does not include estimated interest of $21,000 less than 1 year and $63,000 1-3 years.

These amounts represent the balances outstanding under the bank line of credit. These repayments assume that interest will be paid on a monthly basis and that no additional funds will be drawn.


Results of Operations - Three Months Ended December 31, 2011 and 2010. Net income was $50,961 for the quarter ended December 31, 2011, a 89% increase from $26,898 for the quarter ended December 31, 2010.

Oil and gas sales. Revenue from oil and gas sales was $753,789 for the third quarter of fiscal 2012, a slight increase from $752,778 for the same period of fiscal 2011. This resulted from an increase in oil price and production partially offset by a decrease in gas price and production.

                            2011          2010        % Difference
Oil:
Revenue                   $ 432,968     $ 334,141              29.6 %
Volume (bbls)                 4,727         4,169              13.4 %
Average Price (per bbl)   $   91.59     $   80.15              14.3 %

Gas:
Revenue                   $ 320,821     $ 418,637             (23.4 %)
Volume (mcf)                 95,308       115,911             (17.8 %)
Average Price (per mcf)   $    3.37     $    3.61              (6.6 %)

Production and exploration. Production costs were $233,317 for the third quarter of fiscal 2012, a 16% increase from $200,785 for the same period of fiscal 2011. This was primarily the result of workovers and repairs on our operated wells in Ector, Pecos and Reeves Counties, Texas.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $223,181 for the third quarter of fiscal 2012, a 9% decrease from $244,065 for the same period of fiscal 2011, primarily due to a decrease in gas production partially offset by an increase to full cost amortization base.

General and administrative expenses. General and administrative expenses were $227,928 for the third quarter of fiscal 2012, a 3% decrease from $235,137 for the same period of fiscal 2011. This was primarily due to a decrease in bank charges.

Interest expense. Interest expense was $5,854 for the third quarter of fiscal 2012, a 61% decrease from $15,151 for the same period of fiscal 2011, due to a decrease in borrowings.

Income taxes. There was an income tax expense of $7,069 for the quarter ended December 31, 2011 compared to an income tax expense of $26,061 for the quarter ended December 31, 2010. The Company's current quarter's effective tax rate differs from the federal statutory tax rate due to an increase in intangible development costs. The previous year's effective tax rate for the Company differs from the federal statutory tax rate due to the completion of the tax return which included an increase in current depletion expense and a decrease in the statutory depletion carryforward.

Results of Operations - Nine Months Ended December 31, 2011 and 2010. Net income was $234,618 for the nine months ended December 31, 2011, a 128% increase from 102,714 for the nine months ended December 31, 2010.

Oil and gas sales. Revenue from oil and gas sales was $2,469,784 for the nine months ended December 31, 2011, a 4% increase from $2,368,778 for the same period of fiscal 2011. This resulted from an increase in oil price and production partially offset by a decrease in gas price and production.

                             2011            2010         % Difference
Oil:
Revenue                   $ 1,295,952     $   987,257              31.3 %
Volume (bbls)                  14,211          13,154               8.0 %
Average Price (per bbl)   $     91.19     $     75.05              21.5 %

Gas:
Revenue                   $ 1,173,832     $ 1,381,521             (15.0 %)
Volume (mcf)                  304,761         351,855             (13.4 %)
Average Price (per mcf)   $      3.85     $      3.93              (2.0 %)

Production and exploration. Production costs were $697,548 for the nine months ended December 31, 2011, a 15% decrease from $822,150 for the nine months ended December 31, 2010. This was primarily the result of a workover and repairs on one of our operated wells in Hutchinson County, Texas in which we own 100% working interest.


Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $702,362 for the nine months ended December 31, 2011, a 8% decrease from $763,251 for the nine months ended December 31, 2010 primarily due to a decrease in gas production partially offset by an increase to full cost amortization base.

General and administrative expenses. General and administrative expenses were $723,489 for the nine months ended December 31, 2011, a 6% increase from $682,820 for the nine months ended December 31, 2010. This was due to an increase in stock option compensation expense and accounting fees.

Interest expense. Interest expense was $22,735 for the nine months ended December 31, 2011, an 10% decrease from $25,347 for the nine months ended December 31, 2010 due to a decrease in borrowings.

Income taxes. There was an income tax expense of $74,771 for the nine months ended December 31, 2011 compared to an income tax benefit of $40,101 for the nine months ended December 31, 2010. The Company's effective tax rate through December 31, 2011 of 24% differs from the federal statutory tax rate due to an increase in intangible development costs. The previous year's effective tax rate for the Company differs from the federal statutory tax rate due to the completion of the tax return which included an increase in current depletion expense and a decrease in the statutory depletion carryforward.

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