Mexco Energy Corporation (MXC), a Colorado-based independent oil and gas company, has demonstrated its resilience in the face of a dynamic energy market. With a focus on strategic acquisitions, prudent capital allocation, and operational efficiency, Mexco has positioned itself to capitalize on the industry's opportunities while managing its risks.

Business Overview

Mexco Energy Corporation is engaged in the acquisition, exploration, development, and production of crude oil, natural gas, condensate, and natural gas liquids (NGLs). The company's oil and gas interests are primarily centered in West Texas and Southeastern New Mexico, with additional producing properties and undeveloped acreage across fourteen states. Mexco operates as a non-operator, with all of its oil and gas interests being operated by others.

Financials

For the fiscal year ended March 31, 2023, Mexco reported annual net income of $1,344,952, annual revenue of $6,604,884, annual operating cash flow of $4,433,935, and annual free cash flow of $1,084,609. These figures showcase the company's ability to generate consistent profitability and strong cash flows, even in the face of volatile market conditions.

In the latest quarter, ended December 31, 2023, Mexco reported net income of $345,610, a decrease from the $1,244,785 reported in the same period of the previous year. This decline was primarily driven by a 35% decrease in oil and gas sales, which fell from $2,486,017 in the third quarter of fiscal 2023 to $1,610,595 in the current quarter. The decrease in sales was attributable to both lower production volumes and a decline in commodity prices.

Oil production for the quarter increased by 1.5% to 50,826 barrels, while natural gas production decreased by 15.9% to 122,794 Mcf. The average realized price for oil decreased by 4.3% to $78.65 per barrel, while the average realized price for natural gas plummeted by 63.9% to $1.82 per Mcf.

Despite the revenue decline, Mexco was able to manage its expenses effectively, with production costs decreasing by 16% to $401,035 and depreciation, depletion, and amortization expenses declining by 19% to $400,337. However, general and administrative expenses increased by 16% to $335,153, primarily due to higher accounting fees and employee stock option compensation.

Liquidity

Mexco's financial position remains strong, with a current ratio of 8.58 and a quick ratio of 8.58 as of December 31, 2023. The company's cash and cash equivalents stood at $3,578,938, providing ample liquidity to fund its ongoing operations and capital expenditures.

During the first nine months of fiscal 2024, Mexco expended approximately $1,365,030 for additions to its oil and gas properties, primarily for the drilling and completion of new wells. The company currently plans to participate in the drilling and completion of 48 horizontal wells and 1 vertical well at an estimated aggregate cost of approximately $2,200,000 for the fiscal year ending March 31, 2024.

Acquisitions and Divestitures

Mexco has been actively managing its asset portfolio, both through strategic acquisitions and selective divestitures. In December 2023, the company acquired royalty (mineral) interests in 8 wells operated by Occidental Petroleum Corporation and located in Reeves County, Texas for a purchase price of $364,000. Subsequently, in January 2024, Mexco acquired an additional interest in these same wells for a purchase price of $91,000.

Additionally, in November 2023, the company acquired small royalty (mineral) interests in 13 wells operated by Diamondback Energy, Inc. and located in Midland County, Texas for a purchase price of $45,300. In the same month, Mexco acquired small producing and non-producing royalty (mineral) interests in 1,280 gross acres in Crane, Ector, Midland, and Upton Counties, Texas for a purchase price of $60,500.

On the divestiture front, during the first quarter of fiscal 2024, Mexco received approximately $280,000 in cash from the sale of joint venture leasehold acreage and marginal producing working interest wells in Reagan County, Texas, marginal producing working interest wells in Pecos County, Texas, and interest in surface acreage in Palo Pinto County, Texas.

In December 2023, the company made a 3-year Term Assignment of 98% of its leasehold interest in certain deep rights of 200 acres in Loving and Ward Counties, Texas, receiving $5,000 per net leasehold acre for a total of approximately $980,000. Mexco retained the remaining 2% leasehold interest as a participating interest in the full unit at approximately 0.625% working interest, as well as an overriding royalty interest of 5% proportionately reduced.

Operational Highlights

During the first nine months of fiscal 2024, Mexco participated in the drilling and completion of several horizontal wells in the Delaware Basin, located in the western portion of the Permian Basin in Lea and Eddy Counties, New Mexico. These wells have demonstrated strong initial production rates, with the Wolfcamp Sand formation wells in Lea County producing at an average of 1,480 barrels of oil equivalent (BOE) per day, the Penn Shale formation wells in Lea County producing at an average of 947 BOE per day, and the Bone Spring Sand formation wells in Lea County producing at an average of 2,393 BOE per day.

Mexco's working interests in these wells range from 0.1% to 2.2%, reflecting the company's strategy of participating in a diversified portfolio of projects to manage its risk exposure. The company's focus on non-operated interests allows it to leverage the expertise and operational capabilities of its partners while maintaining a lean organizational structure.

Outlook

Mexco has not provided any formal guidance for the upcoming fiscal year. However, the company's management has expressed cautious optimism about the energy market's outlook, citing the potential for continued volatility in commodity prices. The company remains committed to its prudent capital allocation strategy, focusing on projects that offer attractive risk-adjusted returns and aligning with its long-term growth objectives.

Risks and Challenges

As with any energy company, Mexco faces a range of risks and challenges, including fluctuations in commodity prices, regulatory changes, and operational disruptions. The company's reliance on non-operated interests also exposes it to the operational decisions and performance of its partners, which could impact Mexco's financial results.

Additionally, the company's small size and limited geographic diversification may make it more vulnerable to regional market conditions compared to larger, more diversified peers. Mexco's management team is actively monitoring these risks and implementing strategies to mitigate their potential impact on the company's operations and financial performance.

Conclusion

Mexco Energy Corporation has demonstrated its ability to navigate the volatile energy landscape through a combination of strategic acquisitions, prudent capital allocation, and operational efficiency. The company's focus on non-operated interests in the Permian Basin and other key regions has allowed it to leverage the expertise of its partners while maintaining a lean organizational structure.

Despite the challenges posed by fluctuating commodity prices and regional market conditions, Mexco has consistently generated strong cash flows and profitability, positioning the company for continued growth and value creation. As the energy industry continues to evolve, Mexco's management team remains committed to identifying and capitalizing on opportunities that align with the company's long-term strategic objectives.