Mexco Energy (MXC) - 2021 Q4 - Annual Report

PART I Business Mexco Energy Corporation is an independent oil and gas company focused on acquisition, exploration, and production in the U.S., primarily in the Permian Basin, with 1.504 MMBOE proved reserves - The company is an independent oil and gas entity engaged in acquisition, exploration, development, and production of crude oil and natural gas in the U.S.[11] - The majority of the company's activities are centered in the Permian Basin (West Texas and Southeastern New Mexico), which accounts for 80% of its discounted future net cash flows and 86% of gross revenues[16][26] - All of the company's oil and gas interests are operated by others; Mexco acquires working, royalty, and mineral interests rather than operating properties itself[16] - The business environment in fiscal 2021 was challenging due to the COVID-19 pandemic, which reduced energy demand and caused extreme commodity price volatility, but prices recovered to pre-pandemic levels by Q4 FY2021[21][22][23] Proved Reserves and Present Value (as of March 31, 2021) | Metric | Value | | :--- | :--- | | Total Estimated Proved Reserves | 1.504 million BOE | | Oil and NGLs Percentage | 49% | | Natural Gas Percentage | 51% | | Estimated Present Value (PV-10) | ~$14 million | Company Profile and Strategy Mexco's strategy focuses on acquiring proved oil and gas reserves, primarily working, royalty, and mineral interests, with all properties operated by third parties - The company's primary strategy is to acquire proved reserves, preferably with value in producing wells, behind pipe reserves, and high-quality undeveloped locations[15] - From 1983 to 2021, Mexco completed approximately 80 acquisitions of producing oil and gas properties, including royalties, overriding royalties, minerals, and working interests[17] Oil and Gas Operations Mexco's operations are heavily concentrated in the Permian Basin, representing 80% of future net cash flows, with interests in approximately 6,400 producing wells Key Operational Area Contribution (FY2021) | Basin | % of Discounted Future Net Cash Flows | % of Gross Revenues | | :--- | :--- | :--- | | Delaware Basin | 52% | 66% | | Midland Basin | 14% | 14% | | Total Permian | 80% | 86% | - As of March 31, 2021, the company owned partial interests in approximately 6,400 producing wells located across 14 U.S. states[31] Historical Oil and Gas Production | Year | Oil (Bbls) | Gas (Mcf) | | :--- | :--- | :--- | | 2021 | 50,327 | 324,205 | | 2020 | 44,301 | 294,007 | | 2019 | 35,359 | 295,133 | | 2018 | 34,743 | 318,774 | | 2017 | 34,689 | 356,268 | Major Customers and Competition Mexco operates in a highly competitive oil and gas industry, with significant revenue concentration from one major customer, though a ready market mitigates risk Major Customer Revenue Concentration | Customer | % of Revenues (FY 2021) | % of Revenues (FY 2020) | | :--- | :--- | :--- | | Company A | 66% | 52% | - The company does not believe the loss of any individual customer would have a material adverse effect on its financial position, as a ready market exists for oil and gas production[38] Executive Officers and Employees The company is led by a small team of experienced executive officers and had two full-time and three part-time employees as of March 31, 2021 Executive Officers (as of March 31, 2021) | Name | Age | Position | | :--- | :--- | :--- | | Nicholas C. Taylor | 83 | Chairman and Chief Executive Officer | | Tamala L. McComic | 52 | President, Chief Financial Officer, Treasurer, and Assistant Secretary | | Donna Gail Yanko | 76 | Vice President and Secretary | - As of March 31, 2021, the company had two full-time and three part-time employees[53] Risk Factors The company faces significant risks related to volatile commodity prices, operational challenges, regulatory compliance, reserve estimates, and common stock matters including dilution and CEO influence Risks Related to Business and Industry The company's operations are subject to industry-specific risks including volatile commodity prices, global events, regulations, reserve uncertainty, operational hazards, and limited control as a non-operator - Oil and gas price volatility significantly affects profitability, cash flow, and the ability to fund capital expenditures; lower prices can lead to ceiling test writedowns and reduce economically recoverable reserves[59][60] - The COVID-19 pandemic created significant economic disruption, reducing demand for oil and gas, and while prices recovered, the continued spread of the virus remains a risk[63] - Approximately 32% of the company's total estimated net proved reserves at March 31, 2021, were undeveloped, and their recovery requires significant capital expenditures and successful drilling[70] - As a non-operator for all its properties, the company has limited control over operating procedures, expenditures, and future development, which could reduce production and revenues[81] - The company is dependent on its key personnel, particularly CEO Nicholas C. Taylor, who beneficially owns approximately 46% of the common stock and has significant influence over business strategy and operations[92][93] Risks Related to Common Stock Ownership of Mexco's common stock carries risks including potential dilution, absence of dividends, significant influence by executive officers, and historical price volatility - The company has never paid cash dividends and does not anticipate paying any in the foreseeable future, intending to retain all future earnings to fund business development[96] - As of March 31, 2021, executive officers and directors beneficially owned approximately 51% of the common stock, enabling them to significantly influence all matters requiring stockholder approval[98] - The market price of the company's common stock has been and could continue to be volatile due to factors like commodity prices, political conditions, and limited trading volume[99] Unresolved Staff Comments The company reports no unresolved staff comments - None[102] Properties As of March 31, 2021, Mexco's properties included interests in approximately 6,400 gross wells and 586,000 gross acres, with proved reserves estimated at 1.504 MMBOE, a decrease from the prior year - As of March 31, 2021, the company had interests in approximately 6,400 gross (20 net) oil and gas wells and owned interests in approximately 586,000 gross (3,169 net) acres[103] - Downward revisions in fiscal 2021 were primarily due to reserves being written off because of the five-year development limitation, mainly affecting working interests in the Wolfcamp B Zone in Upton and Reagan Counties, Texas[116] Proved Reserves Summary (as of March 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Net Proved Reserves (BOE) | 1,503,970 | 1,816,195 | | PV-10 Value | $13,758,300 | $21,636,700 | | Standardized Measure | $12,763,000 | $18,976,000 | | Oil Price Used (per Bbl) | $37.42 | $53.23 | | Gas Price Used (per Mcf) | $2.29 | $1.66 | Drilling Activities and Production In fiscal 2021, the company participated in drilling 25 gross development wells, with total production increasing to 104,361 BOE from the prior year Drilling Activity (Working Interest) | Well Type | FY 2021 (Gross/Net) | FY 2020 (Gross/Net) | | :--- | :--- | :--- | | Exploratory Wells | 0 / 0 | 0 / 0 | | Development Wells | 25 / 0.13 | 58 / 0.18 | Net Production and Average Prices | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Oil Production (Bbls) | 50,327 | 44,301 | | Avg. Oil Price (per Bbl) | $40.31 | $52.15 | | Gas Production (Mcf) | 324,205 | 294,007 | | Avg. Gas Price (per Mcf) | $2.30 | $1.40 | | Total BOE | 104,361 | 93,302 | Legal Proceedings The company is not aware of any material legal or governmental proceedings against it - The company is not aware of any legal or governmental proceedings against it, or contemplated to be brought against it[127] Mine Safety Disclosures This item is not applicable to the company - Not applicable[128] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Mexco's common stock trades on the NYSE American, experienced volatility, has never paid dividends, and authorized a share repurchase program with no shares bought in fiscal 2021 - The company's common stock trades on the NYSE American under the symbol "MXC"[129] - The company has never declared or paid cash dividends and does not anticipate paying any in the foreseeable future, as it intends to retain earnings for business operations and development[133] - In September 2020, the Board authorized a share repurchase program of up to $250,000, but no shares were repurchased under this program during the fiscal year ended March 31, 2021[136][137] Selected Consolidated Financial Data This item is not applicable to the company - Not applicable[138] Management's Discussion and Analysis of Financial Condition and Results of Operations For fiscal 2021, Mexco reported net income of $155,932, a turnaround from a prior year loss, driven by increased natural gas sales and reduced G&A expenses Financial Performance Summary (FY2021 vs FY2020) | Metric | FY 2021 | FY 2020 | | :--- | :--- | :--- | | Net Income (Loss) | $155,932 | ($99,478) | | Total Oil & Gas Sales | $2,773,779 | $2,720,353 | | Cash from Operations | $710,047 | $864,960 | - The increase in net income was primarily due to an 81.6% rise in natural gas revenue, driven by a 64.3% increase in average price per Mcf, and a 17% decrease in general and administrative expenses[164][165][167] - The company participated in the drilling and completion of 22 horizontal wells in the Delaware Basin during fiscal 2021 at a cost of approximately $1,030,000[149] Liquidity and Capital Resources The company funds operations through cash flow, borrowings, and asset sales; in fiscal 2021, operating cash flow was $710,047, and working capital increased to $618,960 Summary of Cash Flows (For the Years Ended March 31) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $710,047 | $864,960 | | Net cash used in investing activities | ($1,387,624) | ($1,741,565) | | Net cash provided by financing activities | $701,009 | $782,734 | - Working capital increased by $409,849 during fiscal 2021, reaching $618,960 as of March 31, 2021[147] Results of Operations Mexco's net income improved to $155,932 in fiscal 2021, driven by increased natural gas sales and reduced operating expenses, despite a decline in average oil prices Oil and Gas Sales Breakdown (FY2021 vs FY2020) | Category | 2021 | 2020 | % Difference | | :--- | :--- | :--- | :--- | | Oil Revenue | $2,028,792 | $2,310,127 | (12.1)% | | Oil Volume (bbls) | 50,327 | 44,301 | 13.6% | | Avg. Oil Price (per bbl) | $40.31 | $52.15 | (22.7)% | | Gas Revenue | $744,987 | $410,226 | 81.6% | | Gas Volume (mcf) | 324,205 | 294,007 | 10.3% | | Avg. Gas Price (per mcf) | $2.30 | $1.40 | 64.3% | - Production costs decreased by 5% in fiscal 2021 due to wells being shut-in during May 2020 and operator cost-cutting measures[165] - General and administrative expenses decreased by 17% in fiscal 2021, primarily due to lower salaries, contract services, and professional fees[167] Critical Accounting Policies and Estimates The company's financial statements rely on critical accounting policies, primarily the full cost method for oil and gas properties, requiring a quarterly ceiling test for impairment, and the estimation of proved reserves - The company uses the full cost method of accounting, capitalizing all costs associated with property acquisition, exploration, and development[174] - A quarterly ceiling test is required under the full cost method, which limits the book value of oil and gas properties to the after-tax present value of future net cash flows from proved reserves; exceeding this limit results in a non-cash impairment charge[177] - Estimates of proved reserves are critical as they materially impact DD&A expense and the ceiling test; these estimates are inherently uncertain and depend on numerous assumptions[179][181] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks stem from volatile commodity prices and interest rates, with significant exposure to energy price fluctuations and credit risk concentration from a major customer - The most significant market risk is the pricing of crude oil and natural gas production, which is highly volatile and unpredictable[199] - A +/- $10 per barrel change in the average oil price for fiscal 2021 would have changed oil revenue by $503,270; a +/- $1 per Mcf change in the average gas price would have changed natural gas revenue by $324,205[204] - At March 31, 2021, the company had a $1,180,000 loan balance with a variable interest rate; a one percentage point change in the rate would alter annual pretax income by $11,800[197] - The company has credit risk concentration, with its largest purchaser accounting for 71% of total oil and gas receivables as of March 31, 2021[198] Financial Statements and Supplementary Data This section incorporates by reference the company's consolidated financial statements and supplementary data located on pages F1 through F24 - The information required by this item appears on pages F1 through F24 of the report[205] Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with its accountants on accounting and financial disclosures - None[206] Controls and Procedures Management concluded that the company's internal control over financial reporting and disclosure controls and procedures were effective as of March 31, 2021 - Management concluded that the company's internal control over financial reporting was effective as of March 31, 2021[208] - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[209] Other Information The company reports no other information for this item - None[211] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the Annual Meeting of Stockholders to be held September 9, 2021[211] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement under the caption "Executive Compensation"[213] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Employee Incentive Stock Option Plans"[214] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement under the captions "Certain Relationships and Related Transactions" and "Meetings and Committees of the Board of Directors"[215] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement under the caption "Audit Fees and Services"[216] PART IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K - A list of consolidated financial statements is provided in the "Index to Consolidated Financial Statements" on page F-1[217] - A list of exhibits filed with the Form 10-K is provided in the "Index to Exhibits" on page F-25[218] Financial Statements and Notes Consolidated Financial Statements The consolidated financial statements show total assets increased to $10.83 million, net income of $155,932, and total stockholders' equity rose to $8.82 million in fiscal 2021 Key Financial Metrics (as of March 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Assets | $10,830,687 | $10,070,509 | | Total Liabilities | $2,007,280 | $1,706,147 | | Total Stockholders' Equity | $8,823,407 | $8,364,362 | | Net Income (Loss) | $155,932 | ($99,478) | | Diluted EPS | $0.08 | ($0.05) | Notes to Consolidated Financial Statements The notes detail accounting policies, including the full cost method and ceiling test, long-term debt, deferred tax assets, and unaudited oil and gas reserve data - The company accounts for its oil and gas properties using the full cost method, capitalizing all costs of acquisition, exploration, and development[290] - As of March 31, 2021, the company had $1,180,000 outstanding on its credit facility, which matures in March 2023[329][330] - The company has a net deferred tax asset of $1,258,401 as of March 31, 2021, but has recorded a full valuation allowance against it, believing it is more likely than not that the asset will not be realized[342][346] - In May 2020, the company received a PPP loan of approximately $68,600, which was fully forgiven in November 2020[370][371] Note 16. Oil and Gas Reserve Data (Unaudited) This note provides unaudited data on proved oil and gas reserves, which decreased in fiscal 2021 due to downward revisions, with PUDs at 484 MBOE Changes in Proved Reserves (FY2021) | Category | Oil (Bbls) | Natural Gas (Mcf) | | :--- | :--- | :--- | | As of March 31, 2020 | 1,008,000 | 4,850,000 | | Revision of previous estimates | (292,000) | (200,000) | | Extensions and discoveries | 92,000 | 283,000 | | Sales of minerals in place | (20,000) | (14,000) | | Production | (50,000) | (324,000) | | As of March 31, 2021 | 738,000 | 4,595,000 | Standardized Measure of Discounted Future Net Cash Flows | Date | Value | | :--- | :--- | | March 31, 2021 | $12,763,000 | | March 31, 2020 | $18,976,000 | - At March 31, 2021, proved undeveloped reserves (PUDs) were 484 MBOE, accounting for 32% of total estimated proved reserves[376]