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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
Or
Transition Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the transition period from to
Commission File No. 0-6994
MEXCO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0627918
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
214 West Texas Avenue, Suite 1101, Midland, Texas 79701
(Address of principal executive offices)
(432) 682-1119
(Registrant's telephone number, including area code)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES _____ NO X
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $0.50 par value:
1,733,041 shares outstanding at February 8, 2005
MEXCO ENERGY CORPORATION
Table of Contents
-----------------
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Balance Sheets as of December 31, 2004
(Unaudited) and March 31, 2004 3
Consolidated Statements of Operations (Unaudited) for the
three and nine months ended December 31, 2004 and
December 31, 2003 4
Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended December 31, 2004 and December 31, 2003 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 15
CERTIFICATIONS 16
Page 2
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2004 2004
---- ----
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 76,450 $ 92,795
Accounts receivable:
Oil and gas sales 422,282 396,902
Trade 28,375 3,101
Related parties 793 --
Prepaid costs and expenses 30,382 32,382
------------ ------------
Total current assets 558,282 525,180
Investment in GazTex, LLC 20,509 --
Long-term receivable from GazTex, LLC 253,584 --
Property and equipment, at cost:
Oil and gas properties, using the full
cost method, ($898,247 and $858,602
excluded from amortization as of
December 31, 2004 and March 31, 2004,
respectively) 17,634,429 16,959,560
Other 36,522 34,542
------------ ------------
17,670,951 16,994,102
Less accumulated depreciation,
depletion and amortization 9,761,634 9,346,818
------------ ------------
Property and equipment, net 7,909,317 7,647,284
------------ ------------
$ 8,741,692 $ 8,172,464
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and other accrued expenses $ 99,124 $ 97,308
Income tax payable 85,781 --
Current portion of long-term debt -- 443,378
------------ ------------
Total current liabilities 184,905 540,686
Long-term debt 1,675,000 1,256,622
Asset retirement obligation 382,748 420,665
Deferred income tax liability 620,387 519,272
Commitments and contingencies -- --
Minority interest 20,990 --
Stockholders' equity
Preferred stock - $1 par value;
10,000,000 shares authorized; none outstanding -- --
Common stock - $0.50 par value;
40,000,000 shares authorized;
1,766,566 shares issued 883,283 883,283
Additional paid in capital 3,818,467 3,784,493
Retained earnings 1,301,483 896,368
Treasury stock, at cost (33,525 and 30,525
shares as of December 31, 2004 and March 31,
2004, respectively) (145,571) (128,925)
------------ ------------
Total stockholders' equity 5,857,662 5,435,219
------------ ------------
$ 8,741,692 $ 8,172,464
============ ============
The accompanying note is an integral part
Of the consolidated financial statements.
Page 3
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months ended December 31, 2004 and 2003
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
2004 2003 2004 2003
---- ---- ---- ----
Operating revenue:
Oil and gas sales $ 774,966 $ 650,783 $ 2,172,413 $ 2,186,694
Other 372 1,178 5,555 4,304
----------- ----------- ----------- -----------
Total operating revenue 775,338 651,961 2,177,968 2,190,998
Operating costs and expenses:
Oil and gas production 206,493 237,895 604,458 747,755
Accretion expense 5,824 6,068 19,077 17,804
Depreciation, depletion
and amortization 141,764 162,709 414,816 499,623
General and administrative 134,037 121,719 465,984 394,341
----------- ----------- ----------- -----------
Total operating costs
and expenses 488,118 528,391 1,504,335 1,659,523
----------- ----------- ----------- -----------
287,220 123,570 673,633 531,475
Other income and (expenses):
Interest income 107 53 238 170
Interest expense (23,309) (22,332) (61,115) (67,473)
----------- ----------- ----------- -----------
Net other income and expenses (23,202) (22,279) (60,877) (67,303)
----------- ----------- ----------- -----------
Income before income taxes 264,018 101,291 612,756 464,172
Income tax expense:
Current (6,910) 16,322 106,522 16,322
Deferred 87,569 27,714 101,114 120,365
----------- ----------- ----------- -----------
80,659 44,036 207,636 136,687
----------- ----------- ----------- -----------
Income before cumulative effect
of accounting change 183,359 57,255 405,120 327,485
Cumulative effect of accounting
change, net of tax -- -- -- (102,267)
----------- ----------- ----------- -----------
Net income $ 183,359 $ 57,255 $ 405,120 $ 225,218
=========== =========== =========== ===========
Net income (loss) per common share:
Basic:
Income before cumulative effect
of accounting change $ 0.11 $ 0.03 $ 0.23 $ 0.19
Cumulative effect, net of tax $ -- $ -- $ -- $ (0.06)
Net income $ 0.11 $ 0.03 $ 0.23 $ 0.13
Diluted:
Income before cumulative effect
of accounting change $ 0.10 $ 0.03 $ 0.22 $ 0.18
Cumulative effect, net of tax $ -- $ -- $ -- $ (0.06)
Net income $ 0.10 $ 0.03 $ 0.22 $ 0.12
Pro forma amounts assuming, the
new method of accounting for asset retirement
obligations is applied retroactively:
Net income $ 183,359 $ 57,225 $ 405,120 $ 327,485
Basic earnings per share $ 0.11 $ 0.03 $ 0.23 $ 0.19
Diluted earnings per share $ 0.10 $ 0.03 $ 0.22 $ 0.18
The accompanying note is an integral part
Of the consolidated financial statements.
Page 4
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months ended December 31, 2004 and 2003
(Unaudited)
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 405,120 $ 225,218
Cumulative effect of accounting change,
net of tax -- 102,267
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in deferred income taxes 101,115 120,365
Stock-based compensation 33,973 32,915
Depreciation, depletion and
amortization 414,816 499,623
Accretion of asset retirement obligations 19,077 17,804
(Increase)decrease in accounts receivable (51,447) 202,061
(Increase)decrease in prepaid expenses 2,000 (14,703)
Increase(decrease)in accounts payable
and accrued expenses (2,215) (25,643)
Increase in income tax payable 85,781 16,322
----------- -----------
Net cash provided by operating
activities 1,008,220 1,176,229
Cash flows from investing activities:
Additions to property and equipment (729,816) (627,735)
Increase in long-term receivable (GazTex, LLC) (253,584) --
Investment in subsidiary (GazTex, LLC) (20,509) --
----------- -----------
Net cash used in investing
activities (1,003,909) (627,735)
Cash flows from financing activities:
Acquisition of treasury stock (16,646) (1,385)
Payments of capital lease obligations -- (58,371)
Long-term borrowings 425,000 --
Minority interest contribution 20,990 --
Principal payments on long-term debt (450,000) (480,000)
----------- -----------
Net cash used in financing activities (20,656) (539,756)
----------- -----------
Net increase (decrease) in cash (16,345) 8,738
Cash, beginning of the period 92,795 68,547
----------- -----------
Cash, end of period $ 76,450 $ 77,285
=========== ===========
Interest paid $ 58,445 $ 69,473
Income taxes paid $ 4,538 $ --
The accompanying note is an integral part
Of the consolidated financial statements.
Page 5
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A. Organization and Significant Accounting Policies
- ------ ------------------------------------------------
Organization and Basis of Presentation
- --------------------------------------
Mexco Energy Corporation, a Colorado corporation, was organized in 1972 and
maintains its principal office in Midland, Texas. The Company, its wholly owned
subsidiary, Forman Energy Corporation, a New York corporation, and its 90% owned
subsidiary, OBTX, LLC, a Delaware Limited Liability Company, (collectively the
"Company") are engaged in the acquisition, exploration, development and
production of oil and gas. While the Company owns producing properties and
undeveloped acreage in eleven states, the majority of its activities are
centered in the Permian Basin of West Texas. Although most of the Company's oil
and gas interests are operated by others, the Company operates a number of
properties in which it owns an interest.
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 and
its wholly owned subsidiary as of December 31, 2004, and the results of its
operations and cash flows for the interim periods ended December 31, 2004 and
2003. 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 A of the
"Notes to Consolidated Financial Statements" in the Company's annual report on
Form 10-K filed with the Securities and Exchange Commission ("SEC"). 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.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
- ----------------
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the amounts reported in these
financial statements. Although management believes its estimates and assumptions
are reasonable, actual results may differ materially from those estimates.
Significant estimates affecting these financial statements include the estimated
quantities of proved oil and gas reserves, the related present value of
estimated future net cash flows and the future development, dismantlement and
abandonment costs all of which affect the depreciation, depletion and
amortization calculation on the Company's financial statements. Actual future
production and quantities of recoverable oil and gas reserves most likely will
vary from those estimated which may in turn adversely affect the Company's cash
flow, results of operations and the availability of capital resources.
Stock-based Compensation
- ------------------------
The Company accounts for employee stock option grants in accordance with
Page 6
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"), as amended by Financial Accounting Standards Board
("FASB") Interpretation No. 44, "Accounting for Certain Transactions involving
Stock Compensation," an interpretation of APB Opinion No. 25. The Company
applies the intrinsic value method in accounting for its employee stock options
and records no compensation costs for its stock option awards to employees. The
Company recognizes compensation cost related to stock options awarded to
independent consultants based on fair value of the options at date of grant. For
the nine months ended December 31, 2004, the Company recognized expense of
$33,973 related to these stock options awarded to independent consultants.
The following pro forma information, as required by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"), as amended by Statement of Financial Accounting Standards No. 148 ("SFAS
148"), presents net income and earnings per share information as if expense
relating to stock options issued had been determined based on the fair value at
the grant dates for all employee awards under the plan:
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $ 183,359 $ 57,255 $ 405,120 $ 225,218
Stock-based employee
compensation expense determined
under fair value based method
(SFAS 123), net of tax (23,362) (25,563) (67,396) (61,578)
----------- ---------- ----------- -----------
Net income, pro forma $ 159,997 $ 31,692 $ 337,724 $ 163,640
=========== ========== =========== ===========
Basic earnings per share:
As reported $ 0.11 $ 0.03 $ 0.23 $ 0.13
Pro forma $ 0.09 $ 0.02 $ 0.19 $ 0.09
Diluted earnings per share:
As reported $ 0.10 $ 0.03 $ 0.22 $ 0.12
Pro forma $ 0.09 $ 0.02 $ 0.18 $ 0.09
Long Term Assets
- ----------------
The Company's long-term assets consist of an investment in, and a long-term
receivable from, GazTex, LLC, a Russian company owned 50% by OBTX, LLC. OBTX,
LLC is a Delaware limited liability company in which Mexco owns 90% of the
interest, with the remaining 10% divided equally among three individuals, one of
whom is Arden Grover, a director of Mexco Energy Corporation. The geological and
geophysical costs associated with the evaluation of Russian properties have been
paid by the Company and are recorded as a long-term receivable from GazTex, LLC.
GazTex, LLC was formed during fiscal 2005 and through December 31, 2004 has no
operations other than the evaluation activity.
Asset Retirement Obligations
- ----------------------------
The Company's asset retirement obligations relate to the future plugging and
abandonment of oil and gas properties. The Company adopted SFAS No. 143 on April
1, 2003. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recorded in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
The related cumulative adjustment to 2004 net income was a decrease of $102,267
net of tax, or ($0.06) per share. Additionally, in 2004, the Company recorded an
initial asset retirement obligation liability of $358,419 and an increase to net
properties and equipment and other assets of $210,206.
Page 7
The asset retirement obligations are recorded at fair value and accretion
expense, recognized over the life of the property, increases the liability to
its expected settlement value. If the fair value of the estimated asset
retirement obligation changes, an adjustment is recorded for both the asset
retirement obligation and the asset retirement cost.
The following table provides a rollforward of the asset retirement obligations
for the current period:
Carrying amount of asset retirement obligations
as of April 1, 2004 $ 420,665
Liabilities incurred 1,716
Liabilities settled (41,210)
Accretion expense 19,077
---------
Carrying amount of asset retirement obligations
as of December 31, 2004 $ 400,248
=========
The current portion of the asset retirement obligation as of December 31, 2004
is $17,500 and is included in accounts payable and other accrued expenses.
Oil and Gas Costs
- -----------------
The cost of certain oil and gas leases that the Company has acquired, but not
evaluated has been excluded in computing amortization of the full cost pool. The
Company will begin to amortize these properties when the projects are evaluated,
which is currently estimated to be by December 31, 2005. Costs excluded from
amortization at December 31, 2004 total $898,247 for U.S. properties.
Earnings Per Share
- ------------------
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares and dilutive potential common shares (stock options and warrants)
outstanding during the period. The following is a reconciliation of the number
of shares used in the calculation of basic earnings per share and diluted
earnings per share for the three and nine-month periods ended December 31, 2004
and 2003.
Three Months Ended Nine Months Ended
December 31 December 31
----------- -----------
2004 2003 2004 2003
---- ---- ---- ----
Weighted average number of
common shares outstanding 1,733,758 1,736,041 1,735,277 1,736,049
Incremental shares from the
assumed exercise of dilutive
stock options 57,249 130,809 91,159 88,338
--------- --------- --------- ---------
1,791,007 1,866,850 1,826,436 1,824,387
========= ========= ========= =========
Options to purchase 159,000 shares at an average exercise price of $6.87 and
options and warrants to purchase 10,000 shares at an average exercise price of
$7.00 outstanding at December 31, 2004 and December 31, 2003, respectively, were
not included in the computation of diluted net income per share because the
exercise price of the options and warrants was greater than the average market
price of the common stock of the Company and, therefore, the effect would be
antidilutive.
Warrants issued December 5, 2002 to purchase 107,500 shares of common stock at
an exercise price of $5.00 expired December 5, 2004.
Page 8
Income Taxes
- ------------
The Company recognizes deferred tax assets and liabilities for future tax
consequences of temporary differences between the carrying amounts of assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates applicable to the years in which those
differences are expected to be settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in net income in the period
that includes the enactment date. Current income tax expense (benefit) for the
three and nine months ended December 31, 2004 is ($6,910) and $106,522,
respectively. Current income tax expense for the three and nine months ended
December 31, 2003 is $16,322. The 2003 current tax expense was reduced by
applying the tax loss carry forward of approximately $139,000 from the year
ending March 31, 2003. The Company's effective income tax rate increased to 34%
for the nine months ended December 31, 2004 from 24% for the year ended March
31, 2004. The year ended March 31, 2004 included a tax benefit for depletion in
excess of basis as well as the effect of graduated rates.
Stockholders' Equity
- --------------------
During the nine month period ended December 31, 2004, the Company paid $16,646
to purchase 3,000 shares of its common stock for treasury.
Long Term Liabilities
- ---------------------
Long term debt consists of a revolving credit agreement with Bank of America,
N.A. ("Bank"), which provides for a credit facility of $5,000,000, subject to a
borrowing base determination. On July 29, 2004, the borrowing base was
redetermined and set at $2,500,000. As of December 31, 2004, the balance
outstanding under this agreement was $1,675,000. No principal payments are
required through December 31, 2005 based on the revised borrowing base. Amounts
borrowed under this agreement are collateralized by the common stock of the
Company's wholly owned subsidiary and all oil and gas properties.
The asset retirement obligation as of December 31, 2004 represents the present
value of the Company's estimated asset retirement obligations under SFAS 143.
Accounting Pronouncements
- -------------------------
Staff Accounting Bulletin ("SAB") No. 106, regarding the application of FASB
Statement No. 143, Accounting for Asset Retirement Obligations, by oil and gas
producing companies following the full cost accounting method was issued in
September 2004. SAB 106 provided an interpretation of how a company, after
adopting Statement 143, should compute the full cost ceiling to avoid double
counting the expected future cash outflows associated with asset retirement
costs. The provisions of this interpretation have been applied by the Company
and have no material financial impact.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R) which eliminates the
alternative to use APB Opinion 25's intrinsic value method of accounting that
was provided in Statement 123 as originally issued. SFAS 123R requires entities
to recognize the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards. The
Company accounts for its employee stock option plans under the intrinsic value
recognition and measurement provisions of Opinion 25 and discloses the effect on
net income and earnings per share had compensation cost for the plans been
determined based on the fair value of the options on the grant date. See Note A
(Stock Based Compensation) to the Unaudited Consolidated Financial Statements.
The Company is currently evaluating the effects of the transition to the fair
value method as required in SFAS 123R, which will be effective for the Company
beginning July 1, 2005.
Page 9
MEXCO ENERGY CORPORATION AND SUBSIDIARY
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 can be identified with words and
phrases such as "believes," "expects," "anticipates," "should," "estimates,"
"foresees" or other words and phrases of similar meaning. Forward-looking
statements appear throughout this Form 10-Q and include statements regarding
Company plans, beliefs or current expectations with respect to, among other
things: profitability, planned capital expenditures; estimates of oil and gas
production, estimates of future oil and gas prices; estimates of oil and gas
reserves; future financial condition or results of operations; and 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 the Company has made assumptions that it believes are
reasonable, the assumptions that support its 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. The Company does not
undertake to update, revise or correct any of the forward-looking information.
Liquidity and Capital Resources
- -------------------------------
Historically, the Company's sources of funding have been from operating
activities, bank financing and the issuance of common stock.
The Company's focus is on increasing profit margins while concentrating on
obtaining gas reserves with low cost operations by acquiring and developing
primarily gas properties with potential for long-lived production.
For the first nine months of fiscal 2005, cash flow from operations was
$1,029,210 compared to $1,176,229 for the first nine months of fiscal 2004. The
cash flow from operations for the first nine months of fiscal 2005 included the
effects of an increase in accounts receivable and an increase in income tax
payable. Cash of $729,816 was used for additions to property and equipment and
cash of $16,646 was used for the acquisition of treasury stock. Cash of $25,000,
net of borrowings, was used to reduce the balance outstanding on the Company's
line of credit. Accordingly, net cash decreased $16,345.
In January 2005, the Company purchased partially developed royalty interests for
$550,000. The majority of the wells are located in Freestone and Limestone
Counties, Texas and operated by Anadarko Petroleum, XTO, and Devon Energy. These
properties contain 71 producing wells and an additional nine (9) permitted
and/or drilling wells in the Cotton Valley formation. This acreage contains
approximately 83 potential undeveloped locations, which would be principally
Cotton Valley infill wells.
In August 2004, the Company purchased partially developed royalty interests in
Freestone County, Texas for $500,000. These properties, operated by XTO and
Anadarko Energy, Inc., contain 31 producing wells and an additional seven
permitted and/or drilling wells in the Cotton Valley formation. This acreage
contains approximately 19 potential undrilled locations on 40 acre spacing.
In March 2004, the Company purchased partially developed royalty interests in
Jackson Parish, Louisiana and interests in Limestone County, Texas for
approximately $224,000. The properties in Limestone County, operated by XTO
Energy, Inc., are in the Cotton Valley formation and contain 23 producing wells
and an additional 6 permitted and/or
Page 10
drilling wells. This acreage contains approximately 100 potential undrilled
locations on 40 acre spacing. The property in Louisiana, operated by Anadarko
and producing from the Lower Cotton Valley formation, contains 3 producing wells
and an additional 5 permitted and/or drilling wells. These royalty purchases
advanced the Company's primary goal of acquiring natural gas reserves.
In March 2004, the Company signed an agreement in Moscow, Russia to begin a
preliminary feasibility study for exploration and development of oil and natural
gas reserves in Russia. A team of U.S. and Russia experts commenced an
evaluation of a number of partially developed oil and natural gas fields located
in Russia. Mexco Energy Corporation has formed OBTX, LLC, a Delaware limited
liability company, in which Mexco owns a 90% interest with the remaining 10%
interest split equally among three individuals, one of which is Arden Grover, a
director of Mexco Energy Corporation. OBTX, LLC, plans to participate in any
Russian ventures entered into and own a 50% interest subject to obtaining
financing and owns a 50% interest in a recently formed Russian Company, GazTex
LLC.
The Company has acquired and also is reviewing several projects in the United
States for future participation. The cost of such projects would be funded, to
the extent possible, with existing cash balances and cash flow from operations.
The remainder may be funded through borrowings on the bank credit facility
discussed below.
At December 31, 2004, the Company had working capital of approximately $373,377
compared to a working capital deficit of approximately $15,506 at March 31,
2004, an increase of $388,883 due primarily to the reclassification of the
current portion of long-term debt as a result of the borrowing base
redetermination.
The Company has a revolving credit agreement with Bank of America, N.A.
("Bank"), which provides for a credit facility of $5,000,000, subject to a
borrowing base redetermination. On December 15, 2003 the credit agreement was
amended with a maturity date of August 15, 2005, which was later extended to
October 1, 2005 and then extended to April 1, 2006. On July 29, 2004, the
borrowing base was redetermined and increased to $2,500,000, with no monthly
commitment reductions. As of December 31, 2004, the balance outstanding under
this agreement was $1,675,000. No principal payments are anticipated to be
required through December 31, 2005 based on the revised borrowing base. A letter
of credit for $50,000, in lieu of a plugging bond with the Texas Railroad
Commission covering the properties the Company operates, is also outstanding
under the facility. Amounts borrowed under this agreement are collateralized by
the common stock of Forman and the Company's oil and gas properties. Interest
under this agreement is payable monthly at prime rate (5.25% and 4.00% at
December 31, 2004 and 2003, respectively). The agreement generally restricts the
Company's ability to transfer assets or control of the Company, incur debt,
extend credit, change the nature of the Company's business, substantially change
management personnel, or pay cash dividends. The balance outstanding on the line
of credit as of February 8, 2005 was $2,150,000.
The prices of natural gas and crude oil have fluctuated significantly in recent
years as well as in recent months. Fluctuations in price have a significant
impact on the Company's financial condition and liquidity. However, management
is of the opinion that cash flow from operations and funds available from
financing will be sufficient to provide for its working capital requirements and
capital expenditures for the current fiscal year.
Results of Operations - Three Months Ended December 31, 2004 and 2003
- ---------------------------------------------------------------------
Net income increased 220% from a net profit of $57,255 for the quarter ended
December 31, 2003 to a net profit of $183,359 for the quarter ended December 31,
2004. Individual categories of income and expense are discussed below.
Oil and gas sales increased from $650,783 for the third quarter of fiscal 2004
to $774,966 for the same period of fiscal 2005. This increase of 19% or $124,183
Page 11
resulted primarily from an increase in oil and gas prices partially offset by a
decrease in gas production. Average gas prices increased 34%, from $4.36 per mcf
for the third quarter of fiscal 2004 to $5.84 per mcf for the same period of
fiscal 2005, while average oil prices increased 64%, from $28.04 per bbl for the
third quarter of fiscal 2004 to $46.11 for the same period of fiscal 2005. Oil
and gas production quantities were 4,347 barrels ("bbls") and 121,350 thousand
cubic feet ("mcf") for the third quarter of fiscal 2004 and 4,379 bbls and
98,071 mcf for the same period of fiscal 2005, an increase of 1% in oil
production and a decrease of 19% in gas production. This decrease in production
is partially due to the sale of certain marginal wells that had stable
production for the three months ended December 31, 2003. The decline in
production is also attributable to natural production declines in current
producing wells.
Production costs decreased 13% from $237,895 for the third quarter of fiscal
2004 to $206,493 for the same period of fiscal 2005. This was primarily due to a
decrease in repairs and maintenance to operated wells during the quarter
primarily in Pecos County, Texas.
General and administrative expenses increased 10% from $121,719 for the third
quarter of fiscal 2004 to $134,037 for the same period of fiscal 2005. This is
primarily the result of an increase in consulting services, travel and
organization costs related to participating in the formation of a Russian
company.
Depreciation, depletion and amortization based on production and other methods
decreased 13%, from $162,709 for the third quarter of fiscal 2004 to $141,764
for the same period of fiscal 2005 primarily due to decreased production
combined with an increase in company reserves from the royalties purchased in
August 2004.
Interest expense increased 4% from $22,332 for the third quarter of fiscal 2004
to $23,309 for the same period of fiscal 2005 primarily as a result of the
increase in interest rates during the third quarter of fiscal 2005.
Results of Operations-Nine Months Ended December 31, 2004 and December 31, 2003
- -------------------------------------------------------------------------------
Net income before the cumulative effect of an accounting change increased 24%,
from a net profit of $327,485 for the nine months ended December 31, 2003 to a
net profit of $405,120 for the nine months ended December 31, 2004. Individual
categories of income and expense are discussed below.
Oil and gas sales decreased 1% from $2,186,694 for the nine months ended
December 31, 2004 to $2,172,413 for the same period of fiscal 2005. This
decrease of 1% or $14,281 resulted primarily from a decrease in both oil and gas
production, offset partially by higher oil and gas prices. Average gas prices
increased 18%, from $4.67 per mcf for the first nine months of fiscal 2004 to
$5.53 per mcf for fiscal 2005, and average oil prices increased 48%, from $27.86
per bbl for the first nine months of fiscal 2004 to $41.22 for fiscal 2005. Oil
and gas production quantities were 15,492 bbls and 375,559 mcf for the first
nine months of fiscal 2004 and 12,383 bbls and 300,399 mcf for fiscal 2005, a
decrease of 20% for both oil and gas quantities. This decrease in production is
partially due to the sale of certain marginal wells in fiscal 2005 that had
stable production during most of fiscal 2004. The decline in production is also
attributable to natural production declines in current producing wells.
Production costs decreased 19% from $747,755 for the nine months ended December
31, 2004 to $604,458 for the same period of fiscal 2005. This was primarily due
to a decrease in repairs and maintenance to operated wells in Pecos County,
Texas and in the Panhandle during the first nine months of fiscal 2005.
Depreciation, depletion and amortization based on production and other methods
decreased 17%, from $499,623 for the first nine months of fiscal 2004 to
$414,816 for the same period of fiscal 2005 primarily due to decreased
production combined with an increase in company reserves from the royalties
purchased in August 2004.
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Interest expense decreased 9% from $67,473 for the first nine months of fiscal
2004 to $61,115 for the same period of fiscal 2005 primarily as a result of
lesser borrowings for the nine-month period.
General and administrative expenses increased 18% from $394,341 for the first
nine months of fiscal 2004 to $465,984 for the same period of fiscal 2005. This
is primarily the result of an increase in consulting services, travel and
organization costs related to participating in the formation of a Russian
company. These expenses were approximately $68,316 for the nine-month period.
Asset Retirement Obligations
- ----------------------------
The Company's asset retirement obligations relate to the future plugging and
abandonment of oil and gas properties. The Company adopted SFAS No. 143 on April
1, 2003. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recorded in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
The related cumulative adjustment to 2004 net income was a decrease of $102,267
net of tax, or ($0.06) per share. Additionally, in 2004, the Company recorded an
initial asset retirement obligation liability of $358,419 and an increase to net
properties and equipment and other assets of $210,206.
The asset retirement obligations are recorded at fair value and accretion
expense, recognized over the life of the property, increases the liability to
its expected settlement value. If the fair value of the estimated asset
retirement obligation changes, an adjustment is recorded for both the asset
retirement obligation and the asset retirement cost.
The following table provides a rollforward of the asset retirement obligations
for the current period:
Carrying amount of asset retirement obligations
as of April 1, 2004 $ 420,665
Liabilities incurred 1,716
Liabilities settled (41,210)
Accretion expense 19,077
---------
Carrying amount of asset retirement obligations
as of December 31, 2004 $ 400,248
=========
The current portion of the asset retirement obligation as of December 31, 2004
is $17,500 and is included in accounts payable and other accrued expenses.
New Accounting Pronouncements
- -----------------------------
Staff Accounting Bulletin ("SAB") No. 106, regarding the application of FASB
Statement No. 143, Accounting for Asset Retirement Obligations, by oil and gas
producing companies following the full cost accounting method was issued in
September 2004. SAB 106 provided an interpretation of how a company, after
adopting Statement 143, should compute the full cost ceiling to avoid double
counting the expected future cash outflows associated with asset retirement
costs. The provisions of this interpretation have been applied by the Company
and have no material financial impact.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R) which eliminates the
alternative to use APB Opinion 25's intrinsic value method of accounting that
was provided in Statement 123 as originally issued. SFAS 123R requires entities
to recognize the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards. The
Company accounts for its employee stock option plans under the intrinsic value
recognition and measurement provisions of Opinion 25 and discloses the effect on
net income and earnings per share had compensation cost for the plans been
determined based on the
Page 13
fair value of the options on the grant date. See Note A (Stock Based
Compensation) to the Unaudited Consolidated Financial Statements. The Company is
currently evaluating the effects of the transition to the fair value method as
required in SFAS 123R, which will be effective for the Company beginning July 1,
2005.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary sources of market risk for the Company include fluctuations in
commodity prices and interest rate fluctuations. At December 31, 2004, the
Company had not entered into any hedge arrangements, commodity swap agreements,
commodity futures, options or other similar agreements relating to crude oil and
natural gas.
At December 31, 2004, the Company had an outstanding loan balance of $1,675,000
under its $5.0 million revolving credit agreement, which bears interest at the
prime rate, which varies from time to time. If the interest rate on the
Company's bank debt increases or decreases by one percentage point, the
Company's annual pretax income would change by $16,750, based on the outstanding
balance at December 31, 2004.
Credit Risk. Credit risk is the risk of loss as a result of nonperformance by
other parties of their contractual obligations. The Company's primary credit
risk is the long-term receivable from GazTex, LLC. Due to the nominal
capitalization of GazTex, LLC, the recovery of the receivable is entirely
dependent upon the success of the venture including obtaining the properties and
financing, as to which there can be no certainty. Another risk for the Company
is related to oil and gas production sold to various purchasers and the
receivables generally are uncollateralized. At December 31, 2004, the Company's
largest credit risk associated with any single purchaser was $67,763. The
Company has not experienced any significant credit losses.
Volatility of Oil and Gas Prices. The Company's revenues, operating results and
future rate of growth are highly dependent upon the prevailing market prices of,
and demand for, oil and natural gas. These commodity prices are subject to wide
fluctuations and market uncertainties due to a variety of factors that are
beyond Company control. These factors include the level of global demand for
petroleum products, foreign supply of oil and gas, the establishment of and
compliance with production quotas by oil exporting countries, weather
conditions, the price and availability of alternative fuels, and overall
economic conditions, both foreign and domestic. The Company cannot predict
future oil and gas prices with any degree of certainty. Sustained weakness in
oil and gas prices may adversely affect the Company's ability to obtain capital
for the Company's exploration and development activities and may require a
reduction in the carrying value of the Company's oil and gas properties.
Similarly, an improvement in oil and gas prices can have a favorable impact on
the Company's financial condition, results of operations and capital resources.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Mexco's Chief Executive Officer and Chief Financial Officer performed an
evaluation of the Company's disclosure controls and procedures. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Securities Exchange Act is
accumulated and communicated to the issuer's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Based on this evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures are
effective as of December 31, 2004. In addition, there has been no significant
change in the Company's internal control over financial reporting during the
quarter ended December 31, 2004 that has materially affected, or is reasonably
likely to materially affect the Company's internal control over financial
reporting.
Page 14
PART II - OTHER INFORMATION
Item 1. Legal proceedings
-----------------
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
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 by the Chief Executive Officer of Mexco Energy
Corporation pursuant to 18 U.S.C. ss.1350
32.2 Certification by the Chief Financial Officer of Mexco Energy
Corporation pursuant to 18 U.S.C. ss.1350
Reports on Form 8-K
Form 8-K filed October 27, 2004 pursuant to Item 8.01, announcing stock purchase
for the treasury account.
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 8, 2005 /s/ Nicholas C. Taylor
-----------------------
Nicholas C. Taylor
President
Dated: February 8, 2005 /s/ Tamala L. McComic
-----------------------
Tamala L. McComic
Vice President, Treasurer and
Assistant Secretary
Page 15