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, 2005
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, 2006
MEXCO ENERGY CORPORATION
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of December 31, 2005
(Unaudited) and March 31, 2005 3
Consolidated Statements of Operations (Unaudited) for
the three and nine months ended December 31, 2005 and
December 31, 2004 4
Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended December 31, 2005 and December 31, 2004 5
Notes to Consolidated Financial Statements (Unaudited) 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 11
Item 4. Controls and Procedures 11
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Other Information
Item 5. Exhibits and Reports on Form 8-K
SIGNATURES 12
CERTIFICATIONS 13
Page 2
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31 March 31
2005 2005
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 81,125 $ 85,209
Accounts receivable:
Oil and gas sales 581,347 418,348
Trade 3,021 23,258
Related parties 1,062 2,103
Prepaid costs and expenses 64,080 7,362
------------ ------------
Total current assets 730,635 536,280
Investment in GazTex, LLC 282,126 282,126
Property and equipment, at cost
Oil and gas properties, using the full cost method
($970,831 and $921,719 excluded from amortization
as of December 31, 2005 and March 31, 2005 respectively) 18,792,530 18,376,974
Other 39,848 36,855
------------ ------------
18,832,378 18,413,829
Less accumulated depreciation,
depletion, and amortization 10,335,206 9,929,086
------------ ------------
Property and equipment, net 8,497,172 8,484,743
------------ ------------
$ 9,509,933 $ 9,303,149
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 103,094 $ 111,675
Income tax payable 295,740 48,127
------------ ------------
Total current liabilities 398,834 159,802
Long-term debt 1,125,000 1,990,000
Asset retirement obligation 375,714 374,506
Deferred income tax liability 730,933 715,284
Minority interest 25,362 25,362
Commitments and contingencies
Stockholders' equity
Preferred stock - $1.00 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 3,841,238 3,826,592
Retained earnings 2,275,144 1,473,895
Treasury stock, at cost (33,525 shares) (145,575) (145,575)
------------ ------------
Total stockholders' equity 6,854,090 6,038,195
------------ ------------
$ 9,509,933 $ 9,303,149
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
Page 3
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
2005 2004 2005 2004
----------------------------- -----------------------------
Operating revenue:
Oil and gas sales $ 1,111,524 $ 774,966 $ 2,848,159 $ 2,172,413
Other 387 372 2,755 5,555
------------ ------------ ------------ ------------
Total operating revenues 1,111,911 775,338 2,850,914 2,177,968
Operating expenses:
Production 223,169 206,493 648,844 604,458
Accretion of asset retirement obligation 6,566 5,824 18,132 19,077
Depreciation, depletion, and amortization 129,398 141,764 406,120 414,816
General and administrative 193,997 134,037 569,478 465,984
------------ ------------ ------------ ------------
Total operating expenses 553,130 488,118 1,642,574 1,504,335
------------ ------------ ------------ ------------
Operating profit 558,781 287,220 1,208,340 673,633
Other income (expense):
Interest income 232 107 594 238
Interest expense (25,286) (23,309) (82,159) (61,115)
------------ ------------ ------------ ------------
Net other expense (25,054) (23,202) (81,565) (60,877)
------------ ------------ ------------ ------------
Earnings before income taxes and minority
interest 533,727 264,018 1,126,775 612,756
Income tax expense:
Current 179,287 (6,910) 321,230 106,522
Deferred 3,019 87,569 15,649 101,114
------------ ------------ ------------ ------------
182,306 80,659 336,879 207,636
Income before minority interest 351,421 183,359 789,896 405,120
Minority interest in loss of subsidiary 3,187 -- 11,353 --
------------ ------------ ------------ ------------
Net income $ 354,608 $ 183,359 $ 801,249 $ 405,120
============ ============ ============ ============
Net income per common share:
Basic: $ 0.20 $ 0.11 $ 0.46 $ 0.23
Diluted: $ 0.19 $ 0.10 $ 0.43 $ 0.22
The accompanying notes are an integral part of
the consolidated financial statements.
Page 4
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended December 31
(Unaudited)
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 801,249 $ 405,120
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in deferred income taxes 15,649 101,115
Stock-based compensation 14,646 33,973
Depreciation, depletion, and amortization 406,120 414,816
Accretion of asset retirement obligations 18,132 19,077
Minority interest in loss of OBTX, LLC (11,353) --
Increase in accounts receivable (141,721) (51,447)
Decrease (increase) in prepaid expenses (56,718) 2,000
Increase in income taxes payable 247,613 85,781
Decrease in accounts payable and accrued expenses (13,396) (2,215)
------------ ------------
Net cash provided by operating activities 1,280,221 1,008,220
Cash flows from investing activities:
Additions to oil and gas properties (445,190) (729,816)
Increase in long-term receivable (GazTex, LLC) -- (253,584)
Investment in subsidiary (GazTex, LLC) -- (20,509)
Proceeds from sale of oil and gas properties and equipment 14,532 --
------------ ------------
Net cash used in investing activities (430,658) (1,003,909)
Cash flows from financing activities:
Acquisition of treasury stock (16,646)
Long-term borrowings -- 425,000
Reduction of long-term debt (865,000) (450,000)
Minority interest contributions 11,353 20,990
------------ ------------
Net cash (used in) provided by financing activities (853,647) (20,656)
------------ ------------
Net decrease in cash and cash equivalents (4,084) (16,345)
Cash and cash equivalents at beginning of year 85,209 92,795
------------ ------------
Cash and cash equivalents at end of period $ 81,125 $ 76,450
============ ============
Interest paid $ 83,776 $ 58,445
Income taxes paid $ 73,617 $ 4,538
The accompanying notes are an integral part of
the consolidated financial statements.
Page 5
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
Mexco Energy Corporation (a Colorado Corporation), its wholly owned subsidiary,
Forman Energy Corporation, and its 90% owned subsidiary, OBTX, LLC (a Delaware
Limited Liability Company) (collectively, the "Company") are engaged in the
exploration, development and production of natural gas, crude oil, condensate
and natural gas liquids (NGLs). OBTX, LLC was formed on April 8, 2004, and is
included in the consolidated financial statements since its date of formation.
Although most of the Company's oil and gas interests are centered in West Texas,
the Company owns producing properties and undeveloped acreage in ten states.
Although most of the Company's oil and gas interests are operated by others, the
Company operates several 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 as
of December 31, 2005, and the results of its operations and cash flows for the
interim periods ended December 31, 2005 and 2004. 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.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the
accounts of Mexco Energy Corporation and its wholly owned and majority owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
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 informed judgments and estimates that affect the
reported amounts of assets and liabilities as of the date of the financial
statements and affect the reported amounts of revenues and expenses during the
reporting period. 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.
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
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 ending December 31, 2005, the Company recognized $14,646
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:
Page 6
Three Months Ended Nine Months Ended
December 31 December 31
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income, as reported $ 354,608 $ 183,359 $ 801,249 $ 405,120
Deduct: Stock-based employee
compensation expense determined
under fair value based method
(SFAS 123), net of tax (15,033) (23,362) (57,327) (67,396)
------------ ------------ ------------ ------------
Net income, pro forma $ 339,575 $ 159,997 $ 743,922 $ 337,724
============ ============ ============ ============
Basic earnings per share:
As reported $ 0.20 $ 0.11 $ 0.46 $ 0.23
Pro forma $ 0.20 $ 0.09 $ 0.43 $ 0.19
Diluted earnings per share:
As reported $ 0.19 $ 0.10 $ 0.43 $ 0.22
Pro forma $ 0.18 $ 0.09 $ 0.40 $ 0.18
Asset Retirement Obligations. The Company's asset retirement obligations relate
to the plugging and abandonment of oil and gas properties. The fair value of a
liability for an asset retirement obligation is required to be recorded in the
period in which it is incurred with a corresponding increase in the carrying
amount of the related long-lived asset.
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
during the first nine months of fiscal 2006:
Carrying amount of asset retirement obligations
as of April 1, 2005 $ 395,046
Liabilities incurred 1,180
Liabilities settled (18,104)
Accretion expense 18,132
------------
Carrying amount of asset retirement obligations
as of December 31, 2005 396,254
Less: Current portion 20,540
------------
Non-Current asset retirement obligation $ 375,714
============
The non-current portion of the asset retirement obligation, which is included on
the consolidated balance sheet, was $375,714 at December 31, 2005. The current
portion of the asset retirement obligation as of December 31, 2005, was $20,540
and is included on the consolidated balance sheet in accounts payable and
accrued expenses. Accretion expense was $18,132 and $19,077 for the nine months
ending December 31, 2005 and 2004, respectively.
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 calendar
year. Costs excluded from amortization at December 31, 2005 total $970,831 for
U.S. properties. Of this amount, approximately $856,000 relates to a lease which
originally expired in January 2006. The Company extended this lease for thirty
(30) days through February 8, 2006. However, the Company has decided not to
further extend this lease due to the inability to secure drilling participants.
These costs will be included in the full cost amortization base in the fourth
quarter of fiscal 2006.
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, 2005 and 2004.
Page 7
Three Months Ended Nine Months Ended
December 31 December 31
2005 2004 2005 2004
------------ ------------ ------------ ------------
Weighted average number of
common shares outstanding 1,733,041 1,733,758 1,733,041 1,735,277
Incremental shares from the
assumed exercise of dilutive
stock options and warrants 126,211 57,249 150,181 91,159
------------ ------------ ------------ ------------
Dilutive potential common shares 1,859,252 1,791,007 1,883,222 1,826,436
============ ============ ============ ============
Options and warrants to purchase 159,000 shares at an average exercise price of
$6.87 outstanding at December 31, 2004 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. No options outstanding
at December 31, 2005 were excluded in the computation of diluted net income per
share.
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. The effective income tax rate for
the nine months ended December 31, 2005 was 30%. This decreased rate differs
from the statutory rate as a result of a revision of an estimate of statutory
depletion and an adjustment for prior year tax estimate.
Investment in GazTex, LLC. The Company's long-term assets consist of an
investment in GazTex, LLC, a Russian company owned 50% by OBTX, LLC, accounted
for by the equity method. 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. All geological and geophysical costs associated with the evaluation
of Russian properties have been paid 90% by Mexco Energy Corporation and 10% by
the other three owners of OBTX, LLC. GazTex, LLC was formed during fiscal 2005
and through December 31, 2005 has no operations other than the evaluation
activity. As of December 31, 2005, the Company has $282,126 classified as a
long-term investment in GazTex, LLC. The 10% interest in OBTX, LLC is included
in the Company's financial statements as a minority interest. OBTX, LLC, plans
to participate in any Russian venture entered into and own a 50% interest. For
the nine months ended December 31, 2005, the Company has expensed approximately
$114,000 in consulting costs for the evaluation of projects. No costs were
expensed during the first nine months of fiscal 2005. The Company is currently
in negotiations to secure a prospect for this venture. If such negotiations are
not finalized on terms agreeable to both parties, the Company could incur an
impairment on the investment.
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 September 28, 2005,
the borrowing base was redetermined and set at $3,250,000. As of December 31,
2005, the balance outstanding under this agreement was $1,125,000 and matures on
April 1, 2007. Amounts borrowed under this agreement are collateralized by the
common stock of the Company's wholly owned subsidiary and all oil and gas
properties.
Recent Accounting Pronouncements. Share based payment - In December 2004, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R),
Share-Based Payment, which establishes accounting standards for all transactions
in which an entity exchanges its equity instruments for goods and services. SFAS
No. 123(R) focuses primarily on accounting for transactions with employees, and
carries forward without change to prior guidance for share-based payments for
transactions with non employees.
SFAS No. 123(R) eliminates the intrinsic value measurement objective in APB
Opinion 25 and generally requires the Company to measure the cost of employee
services received in exchange for an award of equity instruments based on the
fair value of the award on the date of the grant. The standard requires grant
date fair value to be estimated using either an option-pricing model which is
consistent with the terms of the award or a market observed price, if such a
price exists. Such cost must be recognized over the period during which an
employee is required to provide service in exchange for the award (which is
usually the vesting period). The standard also requires the Company to estimate
the number of instruments that will ultimately be issued, rather than accounting
for forfeitures as they occur.
The Company is required to apply SFAS No. 123(R) to all awards granted, modified
or settled in our first annual reporting period beginning after June 15, 2005.
The Company will adopt SFAS No. 123(R) on April 1, 2006. The Company has not yet
completed the analysis of the impact of SFAS No. 123(R).
Page 8
FASB Interpretation (FIN) No. 47 - In March 2005, the Financial Accounting
Standard Board (FASB) issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligation." This Interpretation clarifies the
definition and treatment of conditional asset retirement obligations as
discussed in FASB Statement of Financial Accounting Standards (SFAS) No. 143,
"Accounting for Asset Retirement Obligations." A conditional asset retirement
obligation is defined as an asset retirement activity in which the time and/or
method of settlement are dependent on future events that may be outside the
control of the Company. FIN 47 states that a company must record a liability
when incurred for conditional asset retirement obligations if the fair value of
the obligation is reasonably estimable. This Interpretation is intended to
provide more information about long-lived assets, more information about future
cash outflows for these obligations and more consistent recognition of these
liabilities. FIN 47 is effective for fiscal years ending after December 15,
2005. The Company does not believe that its financial position, results of
operations or cash flows will be impacted by this Interpretation since the
Company currently records all asset retirement obligations.
FASB Statement No. 154 - In May 2005, the FASB issued FASB Statement No. 154,
Accounting Changes and Error Corrections ("Statement 154"). Statement 154
requires companies to recognize changes in accounting principle, including
changes required by a new accounting pronouncement when the pronouncement does
not include specific transition provisions, retrospectively to prior periods'
financial statements. Statement 154 will become effective for the Company's
fiscal year beginning April 1, 2006. The Company does not believe that the
adoption of Statement 154 will have a material effect on its financial position
or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Unless the context otherwise requires, references to the "Company", "Mexco",
"we", "us" or "our" mean Mexco Energy Corporation and its consolidated
subsidiaries.
Cautionary Statements Regarding Forward-Looking Statements. Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") contains "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Forward-looking statements 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 our 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 we have
made assumptions that we believe are reasonable, the assumptions that support
our forward-looking statements are based upon information that is currently
available and is subject to change. All forward-looking statements in the Form
10-Q are qualified in their entirety by the cautionary statement contained in
this section. We will not undertake to update, revise or correct any of the
forward-looking information.
Liquidity and Capital Resources. Historically, our sources of funding have been
from operating activities and bank financing.
Our 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 2006, cash flow from operations was
$1,280,221 compared to $1,008,220 for the first nine months of fiscal 2005. The
cash flow from operations for the first nine months of fiscal 2006 included the
effects of an increase in accounts receivable, income tax payable and prepaid
expenses. Cash of $445,190 was used for additions to property and equipment and
cash of $865,000 was used to pay on the line of credit during fiscal 2006.
Accordingly, net cash decreased $4,084.
Through December 31, 2005, we have reviewed a number of possible projects in
Russia. We established a long-term investment in GazTex, LLC for our capital
costs of these projects of $282,126. If we are unable to finalize a prospect
related to these capitalized costs, they will be expensed. Any projects reviewed
that we have decided not to continue studying or develop have been expensed. We
expensed approximately $114,000 for the first nine months of fiscal 2006 related
to Russian projects. No costs were expensed during the first nine months of
fiscal 2005.
In December 2005, we purchased an additional mineral interest in the East Ponder
unit located in Denton County, Texas for approximately $52,000. The East Ponder
Unit is 360 acres of pooled leases which are currently being drilled on 40 acre
spacing. The unit has 4 wells currently producing with plans to drill additional
wells in 2006.
Page 9
We continue to focus our efforts on the acquisition of royalties in areas with
significant development potential.
We are reviewing several other projects in which we may participate. The cost of
such projects would be funded, to the extent possible, from existing cash
balances and cash flow from operations. The remainder may be funded through
borrowings on the credit facility discussed below.
At December 31, 2005, we had working capital of $331,801 compared to a working
capital of $376,478 at March 31, 2005, a decrease of $44,677, primarily due to
an increase in income tax payable.
Long-Term Debt. We have 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 September 28, 2005, the borrowing base was
redetermined and set at $3,250,000 with no monthly commitment reductions. As of
December 31, 2005, the balance outstanding under this agreement was $1,125,000.
The borrowing base is evaluated annually, on or about August 1. Amounts borrowed
under this agreement are collateralized by the common stock of our wholly owned
subsidiary and all oil and gas properties. A letter of credit for $50,000, in
lieu of a plugging bond with the Texas Railroad Commission covering the
properties we operate, is also outstanding under the facility. Interest under
this agreement is payable monthly at prime rate (7.25% and 5.25% at December 31,
2005 and 2004, respectively). This agreement generally restricts our ability to
transfer assets or control of the company, incur debt, extend credit, change the
nature of our business, substantially change management personnel or pay cash
dividends. The balance outstanding on the line of credit as of February 6, 2006
was $900,000.
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 our 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, 2005 and 2004. Net
income increased from $183,359 for the quarter ended December 31, 2004 to
$354,608 for the quarter ended December 31, 2005, an increase of $171,249 or
93%.
Oil and gas sales increased from $774,966 for the third quarter of fiscal 2005
to $1,111,524 for the same period of fiscal 2006. This increase of 43%, or
$336,558, resulted from an increase in oil production and increases in both oil
and gas prices offset partially by a decrease in gas production. Average gas
prices increased from $5.84 per mcf for the third quarter of fiscal 2005 to
$9.67 per mcf for the same period of fiscal 2006, while average oil prices
increased from $46.11 per bbl for the third quarter of fiscal 2005 to $55.14 for
the same period of fiscal 2006. Oil and gas production quantities were 4,379
barrels ("bbls") and 98,071 thousand cubic feet ("mcf") for the third quarter of
fiscal 2005 and 4,463 bbls and 89,461 mcf for the same period of fiscal 2006, an
increase of 2% in oil production and a 9% decrease in gas production.
Production costs increased from $206,493 for the third quarter of fiscal 2005 to
$223,169 for the same period of fiscal 2006. This was the result of increased
production taxes due to the increase in oil and gas sales.
General and administrative expenses increased 45% from $134,037 for the third
quarter of fiscal 2005 to $193,997 for the same period of fiscal 2006. This is
primarily the result of an increase in consulting services and travel related to
our Russian activities. These expenses were approximately $32,000 for the third
quarter of fiscal 2006.
Depreciation, depletion and amortization based on production and other methods
decreased 9%, from $141,764 for the third quarter of fiscal 2005 to $129,398 for
the same period of fiscal 2006 primarily due to a decrease in production
quantities.
Interest expense increased 8% from $23,309 for the third quarter of fiscal 2005
to $25,286 for the same period of fiscal 2006, due to increased interest rates,
partially offset by decreased borrowings.
Results of Operations - Nine Months Ended December 31, 2005 and 2004. Net income
increased from $405,120 for the nine months ended December 31, 2004 to $801,249
for the same period of fiscal 2006, an increase of $396,129 or 98%.
Oil and gas sales increased from $2,172,413 for the nine months ended December
31, 2004 to $2,848,159 for the same period of fiscal 2006. This increase of 31%,
or $675,746, resulted from an increase in oil production and increases in both
oil and gas prices offset partially by a decrease in gas production. Average gas
prices increased from $5.53 per mcf for the first nine months ended December 31,
2004 to $7.68 per mcf for the same period of fiscal 2006, while average oil
prices increased from $41.22 per bbl for the first nine months ended December
31, 2005 to $54.05 for the same period of fiscal 2006. Oil and gas production
quantities were 12,383 barrels ("bbls") and 300,399 thousand cubic feet ("mcf")
for the first nine months ended December 31, 2004 and 12,939 bbls and 279,792
mcf for the same period of fiscal 2006, an increase of 4% in oil production.
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Gas production decreased 7% as a result of natural decline.
Production costs increased 7% from $604,458 for the first nine months ended
December 31, 2004 to $648,844 for the same period of fiscal 2006. This was the
result of increased production taxes due to the increase in oil and gas sales.
General and administrative expenses increased 22% from $465,984 for the first
nine months ended December 31, 2004 to $569,478 for the same period of fiscal
2006. This is primarily the result of an increase in consulting services related
to our Russian activities. These expenses were approximately $114,000 for the
nine month period ended December 31, 2005.
Depreciation, depletion and amortization based on production and other methods
decreased 2%, from $414,816 for the first nine months ended December 31, 2004 to
$406,120 for the same period of fiscal 2006, primarily due to a decrease in
production.
Interest expense increased 34% from $61,115 for the first nine months ended
December 31, 2004 to $82,159 for the same period of fiscal 2006 due to increased
interest rates, partially offset by decreased borrowings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary sources of market risk for us include fluctuations in commodity
prices and interest rate fluctuations. At December 31, 2005, we 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, 2005, we had an outstanding loan balance of $1,125,000 under our
$5.0 million revolving credit agreement, which bears interest at the prime rate,
which varies from time to time. If the interest rate on our bank debt increases
or decreases by one percentage point, our annual pretax income would change by
$11,250, based on the outstanding balance at December 31, 2005.
Credit Risk. Credit risk is the risk of loss as a result of nonperformance by
other parties of their contractual obligations. Our primary credit risk is
related to oil and gas production sold to various purchasers and the receivables
generally are uncollateralized. At December 31, 2005, our largest credit risk
associated with any single purchaser was $66,329. We have not experienced any
significant credit losses.
Volatility of Oil and Gas Prices. Our 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 our 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. We cannot predict future oil and
gas prices with any degree of certainty. Sustained weakness in oil and gas
prices may adversely affect our ability to obtain capital for our exploration
and development activities and may require a reduction in the carrying value of
our oil and gas properties. Similarly, an improvement in oil and gas prices can
have a favorable impact on our financial condition, results of operations and
capital resources.
Item 4. Controls and Procedures
We maintain controls and procedures designed to ensure that information required
to be disclosed by us in reports filed or submitted under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission rules and
forms. At the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-15(b). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that its disclosure controls and procedures are effective.
No changes in our internal control over financial reporting occurred during the
quarter ended December 31, 2005 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We were a defendant in a lawsuit that had arisen in the ordinary course
of business related to the oil and gas leases on the Campbell 15-1 well
in Hemphill County, Texas. We released the lease on the Campbell 15-1
well effective January 31, 2006 as part of a pending compromise
settlement agreement in the lawsuit. We believe, the settlement of the
lawsuit and the release of the lease will not have a material effect on
our consolidated financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Other Information
None.
Item 5. Exhibits and Reports on Form 8-K
None.
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 of the Chief Executive Officer and Chief Financial
Officer of Mexco Energy Corporation pursuant to 18 U.S.C. ss.1350
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, 2006 /s/ Nicholas C. Taylor
--------------------------------------
Nicholas C. Taylor
President
Dated: February 8, 2006 /s/ Tamala L. McComic
--------------------------------------
Tamala L. McComic
Vice President, Treasurer and
Assistant Secretary
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