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MXC > SEC Filings for MXC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for MEXCO ENERGY CORP

Form 10-Q for MEXCO ENERGY CORP


13-Nov-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 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 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.

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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.

At September 30, 2012, we had working capital of $266,645 compared to working capital of $476,960 at March 31, 2012, a decrease of $210,315. This was mainly as a result of a decrease in cash and cash equivalents partially offset by a decrease in accounts payable and accrued expenses.

For the first six months of fiscal 2013, cash flow from operations was $388,290, a 39% decrease when compared to the corresponding period of fiscal 2012 and cash of $852,390 was used for additions to oil and gas properties. Accordingly, net cash decreased $402,906.

In March 2011, we purchased approximately 10.8% working interest (7.77% net revenue interest) in 160 gross acres containing 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. In March 2012, we purchased an additional working interest in this acreage for an approximate cash purchase price of $275,000. We now own an approximate 16.2% working interest (11.66% net revenue interest). Two (2) additional wells were drilled during fiscal 2012 and another during the first quarter of fiscal 2013. Our share of the costs for this last well through September 30, 2012 was approximately $111,000. This acreage now contains eight (8) wells operated by Cone and Petree Oil & Gas Exploration, Inc. - four (4) producing oil from the San Andres formation and four (4) producing oil from the Grayburg and San Andres formations at an approximate depth of 5,000 feet. This property contains an additional eight (8) potential drill sites in the Grayburg and San Andres formations with five (5) planned to be drilled in fiscal 2013.

In June 2011, we received $450,000 in cash from Energen Corporation 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. Energen plans to drill three (3) wells on this acreage during our fiscal 2013, one of which has been completed and began testing in August 2012.

During the first six months of fiscal 2013, we participated in 13 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 were drilled to a total depth of approximately 5,000 feet. The unit, operated by Concho Resources, Inc., currently contains approximately 146 producing wells. Mexco's working interest in this unit is .1848% (.14% net revenue interest). Our share of the costs to drill and complete these 13 wells through September 30, 2012 was approximately $51,000.

During the first quarter of fiscal 2012, a joint venture in which we are a working interest partner began drilling the second 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 both of these wells through September 2012 for our approximate 1% working interest was approximately $47,000.

In March 2012, we participated in the drilling of two (2) approximately 12,600' development wells in the Cotton Valley-Bossier formation in the Teague Field of Freestone County, Texas. These wells have been completed and began producing in July 2012. The 680-acre unit, operated by Valence Operating Company, now contains 4 producing wells. Mexco's working interest in this unit is 4.2% (3.7% net revenue interest). Our share of the costs to drill and complete these wells through September 30, 2012 was approximately $199,000.

Two joint ventures in which we are a working interest partner began drilling one
(1) vertical and two (2) horizontal development wells in Lea County, New Mexico. One horizontal 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 September 30, 2012 for our approximate 1% working interest was approximately $198,000.

We acted as operator and drilled a development well in Pecos County, Texas in which Mexco owns 100% working interest (78.8% net revenue interest). This well is currently being completed and tested. Our costs to drill and complete this well through September 30, 2012 were approximately $1,029,000.

Page 12

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 our common stock.

On June 29, 2012, 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 six months ended September 30, 2012, there were no shares repurchased for the treasury account. During the six months ended September 30, 2011, we repurchased 2,000 shares for the treasury at an aggregate cost of $11,980.

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 $72.00 per bbl in October 2011 to a high of $106.25 per bbl in February 2012. The Henry Hub Spot Market Price ("Henry Hub") for natural gas has ranged from a low of $1.82 per MMBtu in April 2012 to a high of $3.72 per MMBtu in October 2011. On September 30, 2012 the WTI posted price for crude oil was $88.75 per bbl and the Henry Hub spot price for natural gas was $3.08 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 current 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 September 30, 2012:

                                                   Payments Due In (1):
                                 Total        less than 1 year       1-3 years       3 years
Contractual obligations:
Secured bank line of credit   $ 1,775,000     $               -     $ 1,775,000     $       -

(1) Does not include estimated interest costs of $48,000 covering the period of less than 1 year and of $145,000 for the period of 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 September 30, 2012 Compared to Three Months Ended September 30, 2011. Net income was $763 for the quarter ended September 30, 2012 compared to $79,272 for the quarter ended September 30, 2011. This was a result of a decrease in operating revenues and an increase in operating expenses partially offset by a decrease in tax expense.

Oil and gas sales. Revenue from oil and gas sales was $734,313 for the second quarter of fiscal 2013, a 9% decrease from $810,655 for the same period of fiscal 2012. This resulted from a decrease in gas price partially offset by an increase in oil price and production.

                            2012          2011        % Difference
Oil:
Revenue                   $ 465,783     $ 419,128              11.1 %
Volume (bbls)                 5,356         4,923               8.8 %
Average Price (per bbl)   $   86.97     $   85.14               2.1 %

Gas:
Revenue                   $ 268,530     $ 391,527             (31.4 %)
Volume (mcf)                101,456       101,106               0.3 %
Average Price (per mcf)   $    2.65     $    3.87             (31.5 %)

Production and exploration. Production costs were $254,513 for the second quarter of fiscal 2013, an 8% increase from $236,330 for the same period of fiscal 2012. This was primarily the result of repairs on our El Cinco operated wells in Pecos County, Texas during the second quarter of fiscal 2013.

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Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $259,780 for the second quarter of fiscal 2013, an 11% increase from $234,006 for the same period of fiscal 2012, primarily due to an increase in oil and gas production and an increase to the full cost pool amortization base.

General and administrative expenses. General and administrative expenses were $236,708 for the second quarter of fiscal 2013, a 5% increase from $225,261 for the same period of fiscal 2012. This was primarily due to an increase in stock option compensation expense.

Interest expense. Interest expense was $10,767 for the second quarter of fiscal 2013, an 81% increase from $5,961 for the same period of fiscal 2012, due to an increase in borrowings.

Income taxes. There was an income tax benefit of $28,534, or (103%), for the three months ended September 30, 2012 compared to an income tax expense of $26,325, or 25%, for the three months ended September 30, 2011. This change in our effective tax rate was primarily the result of an increase in statutory depletion carryforward.

Results of Operations - Six Months Ended September 30, 2012 Compared to Six Months Ended September 30, 2011. For the six months ended September 30, 2012, there was a net loss of $62,454 compared to net income of $183,657 for the six months ended September 30, 2011. This was a result of a decrease in operating revenues.

Oil and gas sales. Revenue from oil and gas sales was $1,358,183 for the six months ended September 30, 2012, a 21% decrease from $1,715,995 for the same period of fiscal 2012. This resulted from an increase in oil production partially offset by a decrease in gas production and a decrease in oil and gas prices.

                            2012          2011        % Difference
Oil:
Revenue                   $ 898,588     $ 862,985               4.1 %
Volume (bbls)                10,425         9,483               9.9 %
Average Price (per bbl)   $   86.20     $   91.00              (5.3 %)

Gas:
Revenue                   $ 459,595     $ 853,010             (46.1 %)
Volume (mcf)                190,506       209,453              (9.0 %)
Average Price (per mcf)   $    2.41     $    4.07             (40.8 %)

Production and exploration. Production costs were $470,363 for the six months ended September 30, 2012, a 1% increase from $464,232 for the six months ended September 30, 2011. This was primarily the result of repairs on our El Cinco operated wells in Pecos County, Texas during the first six months of fiscal 2013.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $491,316 for the six months ended September 30, 2012, a 3% increase from $479,180 for the six months ended September 30, 2011, primarily due to an increase in the full cost pool amortization base partially offset by a slight decrease in gas production.

General and administrative expenses. General and administrative expenses were $528,977 for the six months ended September 30, 2012, a 7% increase from $495,561 for the six months ended September 30, 2011. This was primarily due to an increase in stock option compensation.

Interest expense. Interest expense was $21,626 for the six months ended September 30, 2012, a 28% increase from $16,881 for the same period fiscal 2012 due to an increase in borrowings.

Income taxes. There was an income tax benefit of $98,118, or (61%), for the six months ended September 30, 2012 compared to an income tax expense of $67,702, or 27%, for the six months ended September 30, 2011. This change in our effective tax rate was primarily the result of an increase in statutory depletion carryforward.

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