Mexco Energy: Unearthing Value in Non-Operated Basins (NYSE American: MXC) - MXC Stock Research Report

## Executive Summary / Key Takeaways * Niche Acquisition Strategy Drives Growth: Mexco Energy Corporation (MXC) operates a unique non-operated model, focusing on acquiring royalty and working interests in prolific U.S. basins, particularly the Permian, which contributed 80% of its discounted future net cash flows and gross revenues in fiscal 2025. This strategy allows MXC to benefit from production growth and reserve additions without direct operational overhead. * Solid Fiscal 2025 Performance Amid Volatility: Despite a challenging commodity price environment, MXC reported a 27% increase in net income to $1.71 million and a 10% rise in oil and natural gas sales to $7.12 million for fiscal 2025, driven by increased production volumes and strategic acquisitions. * Leveraging Third-Party Innovation: MXC's model capitalizes on the advanced horizontal drilling and hydraulic fracturing technologies deployed by its third-party operators, enabling efficient resource recovery and reserve growth, particularly from longer lateral wells, without direct R&D investment. * Strategic Capital Allocation & Outlook: The company is committed to optimizing cash flows, divesting non-core assets, and balancing capital spending with liquidity. It plans to develop 72 proved undeveloped wells through fiscal 2028, with 37 slated for fiscal 2026, signaling continued organic growth potential. * Navigating Competitive Headwinds: MXC faces intense competition from larger, integrated players like BP (TICKER:BP) and ConocoPhillips (TICKER:COP), which possess superior scale, technological R&D, and financial resources. MXC's agility in niche markets and diversified well portfolio are key competitive advantages, though its smaller scale and reliance on external operators present inherent vulnerabilities. ## The Independent's Edge: Mexco's Strategic Play in U.S. Oil & Gas Mexco Energy Corporation, an independent oil and gas company with roots tracing back to Miller Oil Company in 1972, has carved out a distinct position in the U.S. energy landscape. Its core business revolves around the acquisition, exploration, development, and production of crude oil and natural gas properties. Crucially, Mexco operates on a non-operated model, meaning all its oil and gas interests are managed by third-party operators, allowing the company to focus on strategic asset accumulation rather than direct operational complexities. This strategy has been refined over decades, with a primary emphasis on acquiring proved reserves that integrate well with existing operations or in established production areas. Mexco seeks properties with value concentrated in producing wells, behind-pipe reserves, and high-quality proved undeveloped locations. This approach allows the company to leverage the expertise and capital of larger operators while benefiting from production and reserve growth. The broader energy industry currently faces significant volatility, influenced by geopolitical conflicts, rising interest rates, global supply chain disruptions, and concerns about economic downturns. This environment underscores the importance of efficient operations and strategic capital deployment. Within this context, the Permian Basin, particularly the Delaware and Midland Basins in West Texas and Southeastern New Mexico, stands as the cornerstone of Mexco's portfolio. This prolific region accounts for a substantial 80% of Mexco's discounted future net cash flows from proved reserves and an equal share of its gross revenues, highlighting its critical importance to the company's financial health. ## Technological Leverage and Operational Focus While Mexco does not develop proprietary drilling technology, its investment thesis is inherently tied to the technological advancements of its third-party operators. The company strategically acquires interests in properties where advanced techniques, such as horizontal drilling and hydraulic fracturing, are employed. This allows Mexco to benefit from the efficiencies and enhanced recovery rates these technologies offer without incurring the substantial research and development costs associated with their innovation. A key operational benefit Mexco derives from this model is the increased efficiency and greater estimated ultimate recovery from longer lateral wells, as noted in its recent filings. By participating in wells utilizing these modern drilling methods, Mexco effectively gains access to superior production capabilities. This indirect technological leverage contributes to its reserve growth and cash flow generation, providing a competitive edge in acquiring and developing assets. For instance, the company's ability to participate in these advanced wells contributes to its reserve additions and production increases, directly impacting its revenue streams. This approach contrasts with larger, integrated energy companies like BP and ConocoPhillips, which invest heavily in their own advanced refining and exploration technologies. BP, for example, leverages proprietary technology to achieve 10-15% lower operating costs per unit, while ConocoPhillips' scale enables 30% lower costs per barrel. Mexco's model, while capital-light from an R&D perspective, means it relies on the innovation cycles and operational decisions of others. This is a strategic choice that allows for agility in niche markets but also presents a vulnerability in terms of direct control over technological advancement and operational efficiency. ## Financial Performance and Liquidity Mexco Energy demonstrated robust financial performance in fiscal year 2025, concluding March 31, 2025, despite the challenging commodity price environment. The company reported net income of $1.71 million, a significant 27% increase from $1.34 million in fiscal 2024. This improvement was primarily driven by a 10% increase in total operating revenues, reaching $7.36 million. Oil sales, which constitute approximately 84% of total oil and natural gas sales, grew by 14.9% to $6.15 million, fueled by a 19.4% increase in oil production volumes to 83,564 barrels. Natural gas sales, however, saw a 12.9% decrease to $0.97 million, despite a 13.3% increase in volume, reflecting a 23.3% drop in average natural gas prices.

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Other operating revenues surged by 70% to $0.24 million, largely due to increased income from limited liability company investments, indicating successful diversification of revenue streams. While interest income decreased by 46% due to funds being deployed for acquisitions and treasury stock, the company's overall profitability improved. Operating expenses saw a 5% increase in production costs to $1.61 million, attributed to higher production taxes and lease operating expenses on new wells. Depreciation, depletion, and amortization (DDA) expense rose 25% to $2.45 million, reflecting increased production and a decrease in overall reserves. From a liquidity standpoint, Mexco's cash flow from operating activities slightly decreased to $4.27 million in fiscal 2025 from $4.43 million in fiscal 2024. This was influenced by higher non-cash expenses and an increase in accounts receivable, partially offset by an increase in accounts payable and net income. The company utilized $3.42 million for additions to oil and gas properties and made a $1.00 million investment in two limited liability companies. As of March 31, 2025, Mexco had $1.75 million in cash and cash equivalents and a working capital of $2.47 million, down from $3.26 million in the prior year. Notably, the company had no outstanding balance on its credit facility, with $1.50 million available for borrowing, providing ample financial flexibility.

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## Competitive Landscape and Strategic Positioning Mexco Energy operates in a highly competitive oil and gas industry, facing both direct and indirect rivals. Its primary direct competitors include other independent oil and gas companies, as well as major integrated players like CVR Energy (TICKER:CVI), BP, and ConocoPhillips. Compared to larger, integrated entities such as BP and ConocoPhillips, Mexco operates at a significantly smaller scale. BP, a global energy major, boasts substantially higher revenue growth (15-20% in 2023-2024) and superior profitability metrics, with net margins of 8-10% and robust cash flow generation of $20-25 billion. ConocoPhillips, a leading upstream player, also exhibits stronger financial performance, with net margins of 15-20% and cash flow of $10-15 billion, benefiting from its focus on low-cost shale production and advanced exploration technology. These larger competitors leverage their scale for greater operational efficiency, often achieving 20-30% lower operating costs per barrel than smaller independents. CVR Energy, while also an integrated player with refining and midstream assets, offers a more direct comparison in terms of upstream competition. CVI's integrated model provides broader revenue streams and some mitigation against price volatility. Its financial performance, with net margins of 5-8%, generally surpasses Mexco's 5-7% net margins, reflecting CVI's scale and diversified operations. Mexco's revenue growth of 5-10% also trails CVI's 10-15% in recent periods. Mexco's competitive advantages lie in its localized expertise and agility in niche markets. Its non-operated model allows it to participate in diverse U.S. regions, potentially enabling faster project turnaround and cost-effective exploration, with drilling costs estimated to be 15% below some peers due to its regional focus. This strategy allows Mexco to capture underserved markets and benefit from the development activities of larger operators without the associated capital expenditure burden for direct drilling and infrastructure. However, this also means Mexco lacks direct control over operational decisions and technological innovation, making it vulnerable to the performance and strategic shifts of its third-party operators. The company's reliance on third-party operators is a double-edged sword. While it minimizes direct operational risk and capital outlay, it exposes Mexco to the risk of inadequate performance or breaches by these operators, which could negatively impact production and revenues. Furthermore, the intense competition for reserve acquisitions, often involving bid processes, makes it challenging for Mexco to acquire properties without assuming significant price and production risks. ## Outlook and Risk Considerations For fiscal 2026, Mexco's primary business strategies are clear: optimizing cash flows through operating efficiencies and cost reductions, divesting non-core assets, and balancing capital spending with cash flows to maintain ample liquidity. The company's focus on the Permian Basin remains paramount, with 27 wells developed in fiscal 2025, converting approximately 84,000 BOE from proved undeveloped to proved developed producing. Looking ahead, Mexco plans to develop 72 proved undeveloped (PUD) wells through March 31, 2028, with estimated future development costs of $4.01 million. Specifically, 37 wells are planned for fiscal 2026, 12 for fiscal 2027, and 23 for fiscal 2028. This development is expected to be funded through existing cash balances, cash flow from operations, and bank borrowings, with potential for non-core asset sales or common stock issuances if needed. The company anticipates increased production from its mineral interests as third-party operators continue to develop its acreage, which requires no capital expenditure from Mexco and is expected to grow cash flows.

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Despite this positive outlook, several risks warrant investor attention. The volatility of oil and natural gas prices remains the most significant market risk, directly impacting revenues, profitability, and capital resources. Lower prices can lead to non-cash "ceiling test writedowns" under full cost accounting, which reduce equity and earnings without being recoverable. The company's reliance on third-party operators means it cannot control the success or timing of drilling activities, and their failures could adversely affect Mexco's financial condition. Environmental regulations, particularly those concerning greenhouse gas emissions and saltwater disposal in the Permian Basin, pose potential cost increases and could curtail economical drilling. While Mexco maintains a cybersecurity program, the increasing dependence on digital technologies exposes it to cyber threats. Finally, the concentrated ownership and reliance on key executives, Nicholas C. Taylor (CEO) and Tamala L. McComic (President & CFO), present a succession risk, as their unexpected loss could significantly impact operations. ## Conclusion Mexco Energy Corporation presents a compelling investment narrative rooted in its focused, non-operated acquisition strategy within the dynamic U.S. oil and gas sector. By strategically acquiring royalty and working interests, particularly in the highly productive Permian Basin, Mexco effectively leverages the operational expertise and technological advancements of third-party operators without direct R&D or extensive operational overhead. This model has enabled solid financial performance, as evidenced by a 27% surge in net income in fiscal 2025, driven by increased production volumes despite commodity price headwinds. While the company's smaller scale and reliance on external operators introduce inherent vulnerabilities compared to integrated majors, Mexco's agility in niche markets and its disciplined capital allocation, including planned development of proved undeveloped reserves, position it for continued growth. The ability to capitalize on advanced drilling techniques through its partners, coupled with a clear strategy for optimizing cash flows and managing liquidity, underpins its resilience. Investors should monitor commodity price stability and the execution of its PUD development plan, as these factors will be critical to realizing Mexco's long-term value in a competitive and evolving energy landscape.