Company Overview

Mexco Energy Corporation (MXC) is an established player in the oil and gas industry, with a rich history spanning over four decades. As an independent oil and gas exploration and production company, Mexco has navigated the ebbs and flows of the energy market, consistently delivering value to its shareholders through strategic acquisitions, prudent capital allocation, and a focus on operational efficiency.

Founded in 1972 and headquartered in Midland, Texas, Mexco has built a diversified portfolio of oil and gas properties across fifteen states, with its primary operations centered in the prolific Permian Basin of West Texas and Southeastern New Mexico. The company's business model revolves around the acquisition, exploration, development, and production of crude oil, natural gas, condensate, and natural gas liquids (NGLs), with a substantial portion of its revenue derived from oil sales. All of Mexco's oil and gas interests are operated by others.

Historical Performance

Throughout its history, Mexco has faced numerous challenges, including volatility in oil and gas prices during the 1980s and 1990s. Despite these obstacles, the company managed to maintain operations and profitability. In the 2000s, Mexco strategically shifted its focus towards acquiring royalties and non-operated working interests, a move aimed at leveraging its capital more effectively and managing risk. This approach has allowed the company to weather market cycles and position itself for long-term success.

Over the past decade, Mexco has continued to expand its asset base through selective acquisitions of oil and gas properties while also participating in new drilling projects operated by other companies. The company has funded its operations and acquisitions through a combination of cash flow, bank borrowings, and the periodic sale of non-core properties, demonstrating its commitment to maintaining a conservative financial approach.

Financials

Mexco's financial performance has been marked by a combination of growth and stability. In the fiscal year ended March 31, 2024, the company reported total revenue of $6.60 million, a 10% increase from the previous year. Net income for the same period was $1.34 million, or $0.64 per diluted share. The company's operating cash flow during this time was $4.43 million, while free cash flow reached $1.08 million, underscoring its ability to generate strong cash flows to fund its operations and strategic initiatives.

For the nine months ended December 31, 2024, Mexco's revenue from oil and gas sales was $5.21 million, an 11% increase from $4.71 million in the same period of the previous year. This increase was driven by a rise in oil and natural gas production volumes, partially offset by a decrease in oil and natural gas prices. Oil revenue increased 17.3% to $4.60 million, with oil production volumes up 21.4% to 61.69 thousand barrels (Mbbl). However, the average oil price received by Mexco decreased 3.3% to $74.50 per barrel. Natural gas revenue decreased 21.9% to $616,730, despite a 12.8% increase in natural gas production volumes to 420.24 million cubic feet (MMcf), as the average natural gas price fell 30.7% to $1.47 per Mcf.

In the most recent quarter (Q3 2025), Mexco reported revenue of $1.89 million and net income of $469,133. This represents a 14% increase in revenue compared to the same quarter last year, primarily due to an increase in oil and gas production volumes partially offset by a decrease in oil and gas prices.

Other operating revenues, which include income from the company's investments in limited liability companies and settlements from legal proceedings, increased 48.5% to $156,010 for the nine months ended December 31, 2024, up from $105,080 in the same period of the prior year.

Production costs, including taxes, marketing, and lease operating expenses, increased 15% to $1.31 million for the nine-month period, compared to $1.14 million in the prior-year period. This increase was primarily due to higher production taxes resulting from the rise in oil revenues, as well as increased marketing and other charges related to the natural gas pricing environment in the Permian Basin.

Depreciation, depletion, and amortization (DD&A) expense increased 39% to $1.76 million for the nine months ended December 31, 2024, up from $1.27 million in the same period of the previous year. The higher DD&A expense was mainly attributable to an increase in Mexco's full cost amortization base, an increase in oil and gas production, and a decrease in natural gas reserves, partially offset by an increase in oil reserves.

General and administrative expenses were $1.04 million for the nine-month period, a 6% increase from $981,660 in the prior-year period. This increase was primarily due to higher contract and engineering services, partially offset by a decrease in salaries and stock option compensation.

Mexco's income tax expense for the nine months ended December 31, 2024 was $200,030, compared to $398,970 in the same period of the previous year. The decrease was primarily due to a reduction in state income taxes and a lower deferred tax provision. The effective tax rate for state and federal taxes combined decreased from 27% in the prior-year period to 16% in the current period, mainly due to the impact of state income taxes, net of federal benefit, and the effect of permanent differences between book and taxable income.

Liquidity

The company's balance sheet remains solid, with a working capital position of $3.26 million as of March 31, 2024, and a debt-to-equity ratio of just 0.01, indicating a low level of leverage. Mexco's current ratio, a measure of liquidity, stood at 3.52, further demonstrating the company's financial stability and ability to meet its short-term obligations.

As of the latest reported period, Mexco had $910,000 in cash and an available credit line of $1.5 million under a credit facility with West Texas National Bank, which expires in March 2026. The company's quick ratio is also 3.52, matching its current ratio.

Operational Performance

Operationally, Mexco has been proactive in expanding its production capabilities through strategic acquisitions and efficient development of its existing assets. In the fiscal year 2024, the company participated in the drilling of 52 wells, consisting of 51 horizontal wells and 1 vertical well, at a cost of approximately $2.3 million. The company has also been actively engaged in the completion of these wells, investing an additional $300,000 during the same period.

Mexco's growth strategy has been further bolstered by its investment in a limited liability company focused on purchasing mineral interests in the Utica and Marcellus areas of Ohio. As of December 31, 2024, the company had invested $1.6 million out of a total commitment of $2 million, with the investment already returning $182,770, or 11% of the total investment.

Recent Challenges and Adaptability

Despite the challenges posed by the COVID-19 pandemic and the broader volatility in the energy market, Mexco has demonstrated its resilience and adaptability. The company has navigated these turbulent waters by maintaining a disciplined approach to capital allocation, cost management, and operational excellence, ensuring its continued success.

The oil and gas industry has experienced significant volatility in commodity prices, with WTI crude oil prices ranging from $61.73 to $82.89 per barrel and natural gas prices ranging from $1.21 to $3.40 per MMBtu over the last 12 months. Pipeline capacity constraints in the Permian Basin have also contributed to natural gas price volatility in the region, which has negatively impacted Mexco's natural gas revenues.

Future Outlook

Looking ahead, Mexco remains cautiously optimistic about its future prospects. The company currently expects to participate in the drilling and completion of 30 and 19 horizontal wells, respectively, during the fiscal year ending March 31, 2025, at an estimated aggregate cost of $1.5 million. This strategic investment in new production assets, coupled with the company's prudent financial management, positions Mexco well to capitalize on the ongoing recovery in the energy industry.

Risks and Mitigating Factors

Risks facing Mexco include commodity price volatility, regulatory changes, and competition from larger industry players. The recent decline in natural gas prices, partially attributable to pipeline capacity constraints and maintenance issues in the Permian Basin area, has contributed to a wider difference between the WaHa Hub and the Henry Hub pricing points, impacting the company's natural gas revenues. However, the company's diversified asset base, strong balance sheet, and experienced management team provide a solid foundation to weather these challenges and continue delivering value to its shareholders.

Conclusion

In conclusion, Mexco Energy Corporation is a well-established player in the dynamic oil and gas industry, with a proven track record of navigating market cycles and delivering consistent financial and operational performance. Its strategic focus on acquisition, exploration, and efficient development of assets, coupled with a disciplined approach to capital allocation, positions the company for continued success in the years ahead. Despite facing industry-wide challenges such as commodity price volatility and infrastructure constraints, Mexco's diversified portfolio across fifteen states and its focus on operational efficiency provide a strong foundation for future growth and value creation for its shareholders.