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 September 30, 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 November 5, 2004
MEXCO ENERGY CORPORATION
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Balance Sheets as
of September 30, 2004 (Unaudited) and March 31, 2004 3
Consolidated Statements of Operations (Unaudited) for the
three and six months ended September 30, 2004 and
September 30, 2003 4
Consolidated Statements of Cash Flows (Unaudited) for the
six months ended September 30, 2004 and September 30, 2003 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION 14
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 21
Page 2
MEXCO ENERGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2004 2004
------------ ------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 84,350 $ 92,795
Accounts receivable:
Oil and gas sales 369,337 396,902
Trade 25,008 3,101
Related parties 4,131 --
Prepaid costs and expenses 31,754 32,382
------------ ------------
Total current assets 514,580 525,180
Investment in GazTex, LLC 20,509 --
Property and equipment, at cost:
Oil and gas properties, using the full
cost method, ($1,066,670 and $858,602
excluded from amortization as of
September 30, 2004 and March 31, 2004,
respectively) 17,754,015 16,959,560
Other 36,063 34,542
------------ ------------
17,790,078 16,994,102
Less accumulated depreciation,
depletion and amortization 9,619,870 9,346,818
------------ ------------
Property and equipment, net 8,170,208 7,647,284
------------ ------------
$ 8,705,297 $ 8,172,464
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable - trade $ 119,141 $ 97,308
Income tax payable 97,230 --
Current portion of long-term debt -- 443,378
------------ ------------
Total current liabilities 216,371 540,686
Long-term debt 1,875,000 1,256,622
Asset retirement obligation 397,792 420,665
Deferred income tax liability 532,817 519,272
Commitments and contingencies -- --
Minority Interest 2,051 --
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 3,808,779 3,784,493
Retained earnings 1,118,129 896,368
Treasury stock, at cost (30,525 shares) (128,925) (128,925)
------------ ------------
Total stockholders' equity 5,681,266 5,435,219
------------ ------------
$ 8,705,297 $ 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 Six Months ended September 30, 2004 and 2003
(Unaudited)
Three Months Ended Six Months Ended
September 30 September 30
2004 2003 2004 2003
------------ ------------ ------------ ------------
Operating revenue:
Oil and gas sales $ 722,452 $ 768,852 $ 1,397,447 $ 1,535,912
Other 3,174 1,859 5,182 3,125
------------ ------------ ------------ ------------
Total operating revenue 725,626 770,711 1,402,629 1,539,037
Operating costs and expenses:
Oil and gas production 206,226 241,168 397,964 509,860
Accretion expense 6,432 5,912 13,253 11,736
Depreciation, depletion
and amortization 120,280 170,695 273,052 336,914
General and administrative 167,528 156,644 331,947 272,622
------------ ------------ ------------ ------------
Total operating costs
and expenses 500,466 574,419 1,016,216 1,131,132
------------ ------------ ------------ ------------
225,160 196,292 386,413 407,905
Other income and (expenses):
Interest income 77 55 130 117
Interest expense (20,963) (20,860) (37,806) (45,140)
------------ ------------ ------------ ------------
Net other income and expenses (20,886) (20,805) (37,676) (45,023)
------------ ------------ ------------ ------------
Income before income taxes 204,274 175,487 348,737 362,882
Income tax expense:
Current 70,006 -- 113,431 --
Deferred 15,208 57,017 13,545 92,652
------------ ------------ ------------ ------------
85,214 57,017 126,976 92,652
------------ ------------ ------------ ------------
Income before cumulative effect
of accounting change 119,060 118,470 221,761 270,230
Cumulative effect of accounting
change, net of tax -- -- -- (102,267)
------------ ------------ ------------ ------------
Net income $ 119,060 $ 118,470 $ 221,761 $ 167,963
============ ============ ============ ============
Net income (loss) per common share:
Basic:
Income before cumulative effect
of accounting change $ 0.07 $ 0.07 $ 0.13 $ 0.16
Cumulative effect, net of tax $ -- $ -- $ -- $ (0.06)
Net income $ 0.07 $ 0.07 $ 0.13 $ 0.10
Diluted:
Income before cumulative effect
of accounting change $ 0.07 $ 0.06 $ 0.12 $ 0.15
Cumulative effect, net of tax $ -- $ -- $ -- $ (0.06)
Net income $ 0.07 $ 0.06 $ 0.12 $ 0.09
Pro forma amounts assuming, the new
method of accounting for asset retirement
obligations is applied retroactively:
Net Income $ 119,060 $ 118,470 $ 221,761 $ 270,230
Basic earnings per share $ 0.07 $ 0.07 $ 0.13 $ 0.16
Diluted earnings per share $ 0.07 $ 0.06 $ 0.12 $ 0.15
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 Six Months ended September 30, 2004 and 2003
(Unaudited)
2004 2003
---------- ----------
Cash flows from operating activities:
Net income $ 221,761 $ 167,963
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 13,545 92,651
Stock-based compensation 24,286 20,991
Depreciation, depletion and
amortization 273,052 336,914
Accretion of asset retirement obligations 13,253 11,736
Decrease in accounts receivable 1,527 152,572
(Increase)decrease in prepaid expenses 628 (27,204)
Increase in accounts payable
and accrued expenses 13,910 20,253
Increase in income tax payable 97,230 --
---------- ----------
Net cash provided by operating
activities 659,192 878,143
Cash flows from investing activities:
Additions to property and equipment (824,179) (430,209)
---------- ----------
Net cash used in investing
activities (824,179) (430,209)
Cash flows from financing activities:
Acquisition of treasury stock -- (1,385)
Investment in subsidiary (GazTex, LLC) (18,458) --
Payments of capital lease obligations -- (42,668)
Long-term borrowings 425,000 --
Principal payments on long-term debt (250,000) (400,000)
---------- ----------
Net cash (used in) provided by
financing activities 156,542 (444,053)
---------- ----------
Net increase (decrease) in cash (8,445) 3,881
Cash, beginning of the period 92,795 68,547
---------- ----------
Cash, end of period $ 84,350 $ 72,428
========== ==========
Interest paid $ 36,040 $ 47,138
Income taxes paid $ -- $ --
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 and its wholly
owned subsidiary, Forman Energy Corporation, a New York corporation,
(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 September 30, 2004, and the results of its
operations and cash flows for the interim periods ended September 30, 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 Securities and Exchange Commission.
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 balance sheets include the accounts of the Company
and its wholly owned subsidiary. Mexco Energy Corporation owns a 90% interest in
OBTX, LLC which is consolidated herein. 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 and the related present value of
estimated future net cash flows.
Stock-Based Compensation
- ------------------------
The Company accounts for employee stock option grants in accordance with
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
Page 6
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 six months ending September 30, 2004, the Company
recognized $24,286 related to these stock options for 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 Six Months Ended
September 30, September 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income, as reported $ 119,060 $ 118,470 $ 221,761 $ 167,963
Stock-based employee
compensation expense determined
under fair value based method
(SFAS 123), net of tax $ (21,693) $ (25,667) $ (44,034) $ (40,066)
---------- ---------- ---------- ----------
Net income, pro forma $ 97,367 $ 92,803 $ 177,727 $ 127,897
========== ========== ========== ==========
Basic earnings per share:
As reported $ 0.07 $ 0.07 $ 0.13 $ 0.10
Pro forma $ 0.06 $ 0.05 $ 0.10 $ 0.07
Diluted earnings per share:
As reported $ 0.07 $ 0.06 $ 0.12 $ 0.09
Pro forma $ 0.06 $ 0.05 $ 0.10 $ 0.07
Long Term Assets
- ----------------
The Company's long term assets consist of an investment in 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 which is Arden Grover, a
director of Mexco Energy Corporation.
Asset Retirement Obligations
- ----------------------------
The Company's asset retirement obligations relate to the 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.
Page 7
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 1,469
Liabilities settled (25,815)
Accretion expense 13,253
---------
Carrying amount of asset retirement obligations
as of September 30, 2004 $ 409,572
=========
The current portion of the asset retirement obligation as of September 30, 2004
is $11,780 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 within this fiscal year. Costs excluded from
amortization at September 30, 2004 total $874,978 for U.S. properties and
$191,692 for Russian properties. The Russian costs in fiscal 2004 and fiscal
2005 were for the feasibility study referred to in Note H to the Company's
financial statements in its Annual Report to the SEC on Form 10K.
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 six month periods ended September 30, 2004
and 2003.
Three Months Ended Six Months Ended
September 30 September 30
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted average number of
common shares outstanding 1,736,041 1,736,041 1,736,041 1,736,054
Incremental shares from the
assumed exercise of dilutive
stock options 95,291 98,006 108,114 67,102
---------- ---------- ---------- ----------
Dilutive potential common shares 1,831,332 1,834,047 1,844,155 1,803,156
========== ========== ========== ==========
Options and warrants to purchase 110,000 shares at an average exercise price of
$7.24 and 70,000 shares at an average exercise price of $7.61 outstanding at
September 30, 2004 and September 30, 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.
Income Taxes
- ------------
Current income tax expense for the three and six months ended September 30, 2004
is $70,006 and $113,431, respectively. There is no current income tax expense
for the three or six months ended September 30, 2003 due to a tax loss
carryforward of approximately $139,000 from the year ending March 31, 2003.
Page 8
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 September 30, 2004, the balance
outstanding under this agreement was $1,875,000. No principal payments are
required for fiscal 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 September 30, 2004 represents the present
value of the Company's estimated asset retirement obligations under SFAS 143.
Accounting Pronouncements
- -------------------------
In September, 2004 the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 106. This pronouncement will require companies that use
the full cost method for accounting for their oil and gas producing activities
to include an estimate of future asset retirement costs to be incurred as a
result of future development activities on proved reserves in their calculation
of depreciation, depletion and amortization. This pronouncement will also
require these companies to exclude any future cash outflows associated with
settling asset retirement liabilities from their full cost ceiling test
calculation. This standard will also require these companies to disclose the
impact of their asset retirement obligations on their oil and gas producing
activities, ceiling test calculations and depreciation, depletion and
amortization calculations. The Company will adopt the provisions of this
pronouncement in the third quarter of fiscal 2005 and is currently evaluating
the impact, if any, on the Company's consolidated financial statements.
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.
Page 9
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 six months of fiscal 2005, cash flow from operations was $659,192
compared to $878,143 for the first six months of fiscal 2004. The cash flow from
operations for the first six months of fiscal 2005 included the effects of a
decrease in accounts receivable and prepaid expenses and an increase in accounts
payable and accrued expenses. Long-term borrowings provided $175,000, net of
repayments on the line of credit. Cash of $824,179 was used for additions to
property and equipment. Accordingly, net cash decreased $8,445.
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 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 a
feasibility study 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 September 30, 2004, the Company had working capital of approximately $298,209
compared to a working capital deficit of approximately $15,506 at March 31,
2004, an increase of $313,715 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. The borrowing base was redetermined on this date and set at
$1,938,372 with monthly commitment reductions of $45,450 beginning on January 5,
2004. On July 29, 2004, the borrowing base was redetermined and increased to
$2,500,000, with no monthly commitment reductions. As of September 30, 2004, the
balance outstanding under this agreement was $1,875,000. No principal payments
are anticipated to be required for fiscal 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
(4.75% and 4.00% at September 30, 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 November 1, 2004 was $1,850,000.
Page 10
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 September 30, 2004 and 2003
- ----------------------------------------------------------------------
Net income increased from a net profit of $118,470 for the quarter ended
September 30, 2003 to a net profit of $119,060 for the quarter ended September
30, 2004. Individual categories of income and expense are discussed below.
Oil and gas sales decreased from $768,852 for the second quarter of fiscal 2004
to $722,452 for the same period of fiscal 2005. This decrease of 6% or $46,400
resulted primarily from a decrease in both oil and gas production, offset
partially by higher oil and gas prices. Average gas prices increased 21%, from
$4.73 per mcf for the second quarter of fiscal 2004 to $5.71 per mcf for the
same period of fiscal 2005, while average oil prices increased 42%, from $28.66
per bbl for the second quarter of fiscal 2004 to $40.72 for the same period of
fiscal 2005. Oil and gas production quantities were 5,627 barrels ("bbls") and
128,560 thousand cubic feet ("mcf") for the second quarter of fiscal 2004 and
4,137 bbls and 96,981 mcf for the same period of fiscal 2005, a decrease of 26%
in oil production and a decrease of 25% in gas production.
Production costs decreased 14% from $241,168 for the second quarter of fiscal
2004 to $206,226 for the same period of fiscal 2005. This was primarily due to
the decrease in production taxes and other charges as a result of a decrease in
sales for the quarter combined with a decrease in repairs and maintenance to
operated wells during the quarter.
General and administrative expenses increased 7% from $156,644 for the second
quarter of fiscal 2004 to $167,528 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 30%, from $170,695 for the second quarter of fiscal 2004 to $120,280
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 less than 1% from $20,860 for the second quarter of
fiscal 2004 to $20,963 for the same period of fiscal 2005 primarily as a result
of the increase in interest rates during the second quarter of fiscal 2005.
Results of Operations - Six Months Ended September 30, 2004 and September 30,
- --------------------------------------------------------------------------------
2003
- ----
Net income before the cumulative effect of an accounting change decreased 18%,
from a net profit of $270,230 for the six months ended September 30, 2003 to a
net profit of $221,761 for the six months ended September 30, 2004. Individual
categories of income and expense are discussed below.
Page 11
Oil and gas sales decreased 9% from $1,535,912 for the six months ended
September 30, 2004 to $1,397,447 for the same period of fiscal 2005. This
decrease of 9% or $138,465 resulted primarily from a decrease in both oil and
gas production, offset partially by higher oil and gas prices. Average gas
prices increased 12%, from $4.82 per mcf for the first six months of fiscal 2004
to $5.38 per mcf for fiscal 2005, and average oil prices increased 39%, from
$27.79 per bbl for the first six months of fiscal 2004 to $38.54 for fiscal
2005. Oil and gas production quantities were 11,146 bbls and 254,209 mcf for the
first six months of fiscal 2004 and 8,004 bbls and 202,328 mcf for fiscal 2005,
a decrease of 28% and 20%, respectively.
Production costs decreased 22% from $509,860 for the six months ended September
30, 2004 to $397,964 for the same period of fiscal 2005. This was primarily due
to the decrease in production taxes and other charges as a result of a decrease
in sales combined with a decrease in repairs and maintenance to operated wells
during the first and second quarters of fiscal 2005.
Depreciation, depletion and amortization based on production and other methods
decreased 19%, from $336,914 for the first six months of fiscal 2004 to $273,052
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 decreased 16% from $45,140 for the first six months of fiscal
2004 to $37,806 for the same period of fiscal 2005 primarily as a result of
lesser borrowings.
General and administrative expenses increased 22% from $272,622 for the first
six months of fiscal 2004 to $331,947 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 $59,065 for the six-month period.
Asset Retirement Obligations
- ----------------------------
The Company's asset retirement obligations relate to the 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 1,469
Liabilities settled (25,815)
Accretion expense 13,253
----------
Carrying amount of asset retirement obligations
as of September 30, 2004 $ 409,572
==========
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The current portion of the asset retirement obligation as of September 30, 2004
is $11,780 and is included in accounts payable and other accrued expenses.
New Accounting Pronouncements
- -----------------------------
In September, 2004 the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 106. This pronouncement will require companies that use
the full cost method for accounting for their oil and gas producing activities
to include an estimate of future asset retirement costs to be incurred as a
result of future development activities on proved reserves in their calculation
of depreciation, depletion and amortization. This pronouncement will also
require these companies to exclude any future cash outflows associated with
settling asset retirement liabilities from their full cost ceiling test
calculation. This standard will also require these companies to disclose the
impact of their asset retirement obligations on their oil and gas producing
activities, ceiling test calculations and depreciation, depletion and
amortization calculations. The Company will adopt the provisions of this
pronouncement in the third quarter of fiscal 2005 and is currently evaluating
the impact, if any, on our consolidated financial statements.
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 September 30, 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 September 30, 2004, the Company had an outstanding loan balance of $1,875,000
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 $18,750, based on the outstanding
balance at September 30, 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 related to oil and gas production sold to various purchasers and the
receivables generally are uncollateralized. At September 30, 2004, the Company's
largest credit risk associated with any single purchaser was $98,498. 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.
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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 September 30, 2004. In addition, there has been no significant
change in the Company's internal control over financial reporting during the
quarter ended September 30, 2004 that has materially affected, or is reasonably
likely to materially affect the Company's internal control over financial
reporting.
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
14. Code of Business Conduct and Ethics
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.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEXCO ENERGY CORPORATION
(Registrant)
Dated: November 9, 2004 /s/ Nicholas C. Taylor
--------------------------------------
Nicholas C. Taylor
President
Dated: November 9, 2004 /s/ Tamala L. McComic
--------------------------------------
Tamala L. McComic
Vice President, Treasurer and Assistant
Secretary
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