MEXCO ENERGY CORP 10-K

ITEM 1. BUSINESS General Mexco Energy Corporation, a Colorado corporation, is an independent oil and gas company engaged in the acquisition, exploration, development and production of crude oil and natural gas properties located in the United States. Incorporated in April 1972 under the name Miller Oil Company, the Company changed its name to Mexco Energy Corporation effective April 30, 1980. At that time, the shareholders of the Company also approved amendments to the Articles of Incorporation resulting in a one-for-fifty reverse stock split of the Company’s common stock. Our total estimated proved reserves at March 31, 2021 were approximately 1.504 million barrels of oil equivalent (“MMBOE”) of which 49% was oil and natural gas liquids and 51% was natural gas, and our estimated present value of proved reserves was approximately $14 million based on estimated future net revenues excluding taxes discounted at 10% per annum, pricing and other assumptions set forth in “Item 2 – Properties” below. Nicholas C. Taylor beneficially owns approximately 46% of the outstanding shares of our common stock. Mr. Taylor is also our Chairman of the Board and Chief Executive Officer. As a result, Mr. Taylor has significant influence in matters voted on by our shareholders, including the election of our Board members. Mr. Taylor participates in all facets of our business and has a significant impact on both our business strategy and daily operations. 3 Company Profile Since our inception, we have been engaged in acquiring and developing oil and gas properties and the exploration for and production of natural gas, crude oil, condensate and natural gas liquids (“NGLs”) within the United States. We especially seek to acquire proved reserves that fit well with existing operations or in areas where Mexco has established production. Acquisitions preferably will contain most of their value in producing wells, behind pipe reserves and high quality proved undeveloped locations. Competition for the purchase of proved reserves is intense. Sellers often utilize a bid process to sell properties. This process usually intensifies the competition and makes it extremely difficult to acquire reserves without assuming significant price and production risks. We actively search for opportunities to acquire proved oil and gas properties. However, because the competition is intense, we cannot give any assurance that we will be successful in our efforts during fiscal 2022. While we own oil and gas properties in other states, the majority of our activities are centered in West Texas and Southeastern New Mexico. The Company also owns producing properties and undeveloped acreage in fourteen states. We acquire interests in producing and non-producing oil and gas leases from landowners and leaseholders in areas considered favorable for oil and gas exploration, development and production. In addition, we may acquire oil and gas interests by joining in oil and gas drilling prospects generated by third parties. We may also employ a combination of the above methods of obtaining producing acreage and prospects. In recent years, we have placed primary emphasis on the evaluation and purchase of producing oil and gas properties, including working, royalty and mineral interests, and prospects that could have a potentially meaningful impact on our reserves. All of the Company’s oil and gas interests are operated by others. From 1983 to 2021, Mexco Energy Corporation made approximately 80 acquisitions of producing oil and gas properties including royalties, overriding royalties, minerals and working interests both operated and non-operated plus the following most significant and recent acquisitions: 1993-2010 Tabbs Bay Oil Company and Thompson Brothers Lumber Company, respectively dissolved in 1957 and 1947. Purchase covering thousands of acres located respectively in 19 counties of Texas, 3 parishes of Louisiana and one county in Arkansas and 8 counties of Texas, respectively consisting of various mineral, royalty and overriding royalty interests. 1997 Forman Energy Corporation, purchase price of $1,591,000 consisting of primarily working interests in approximately 634 wells located in 12 states. 2010 Southwest Texas Disposal Corporation, purchase price $478,000 consisting of royalty interests in over 300 wells located in 60 counties and parishes of 6 states. 2012 TBO Oil and Gas, LLC, purchase price of $1,150,000 consisting of working interests in approximately 280 wells located in 16 counties of 3 states. 2014 Royalty interests, purchase price of $200,000 covering 43 wells in 12 counties of eight states, primarily in Texas. Royalty interests, purchase price $580,000 covering 580 wells in 87 counties of eight states. Approximately 90% of the net revenue from these royalties is produced by 157 wells located in the Barnett Shale of the Fort Worth Basin of Texas. Also included are interests in 423 wells in 8 states. Non-Operated working interests, purchase price $525,000 for 12.5% (approximately 10% net revenue interest). The purchase included eight wells producing oil on 20-acre spacing at approximately 3,600 foot depth on 190 acres in Pecos County, TX. Royalty and mineral interests, purchase price $1,000,000 covering approximately 1,800 wells in 27 counties of Texas. Of these oil and gas reserves, approximately 80% is natural gas and 20% oil. Non-Operated working interests, purchase price $840,000 in 70 Natural gas producing wells located in 5 counties of Oklahoma. 4 2019 In April 2019, the Company made a less than 1% investment commitment in a limited liability company amounting to $250,000 of which $200,000 has been funded through March 31, 2021. This amount is classified as an investment at cost on the Company’s consolidated balance sheets. The limited liability company is capitalized at approximately $50 million to purchase royalty interests consisting of minerals located in the state of Ohio. As of March 31, 2021 there are 225 gross wells (.85 net wells) of which 215 are Utica gas wells and 10 are Marcellus oil wells either producing, drilling or in process. Industry Environment and Outlook The outbreak of the novel coronavirus (“COVID-19”) in the first calendar quarter of 2020 and its continued spread across the globe in the second, third and fourth calendar quarters of 2020 has resulted, and is likely to continue to result in, significant economic disruption and has, and is likely to continue to, adversely affect the operations of the Company’s business, as the significantly reduced global and national economic activity has resulted in reduced demand for oil and natural gas. Federal, state and local governments mobilized to implement containment mechanisms to minimize impacts to their populations and economies. Various containment measures, which include the quarantining of cities, regions and countries, while aiding in the prevention of further outbreak, have resulted in a severe drop in general economic activity and a resulting decrease in energy demand. In addition, the global economy has experienced a significant disruption to global supply chains. The direct impact to the Company’s operations began to take effect at the close of the fiscal year ended March 31, 2020, and continued through the close of the Company’s third quarter of this fiscal year. The challenging commodity price environment continued in fiscal 2021 and in May 2020, commodity prices experienced extreme volatility resulting in historic lows. In light of these challenges facing our industry and in response to the continued challenging environment, our primary business strategies for fiscal 2022 will continue to include: (1) optimizing cash flows through operating efficiencies and cost reductions, (2) divesting of non-core assets, and (3) working to balance capital spending with cash flows to minimize borrowings, reduce debt and maintain ample liquidity. During the Company’s fourth quarter of fiscal 2021 and continuing through the first quarter of fiscal 2022, oil and natural gas prices recovered to pre-pandemic levels, due in part to the accessibility of vaccines, reopening of states after the lockdown and optimism about the economic recovery. However, the continued spread of the virus, including vaccine-resistant strains, could once again reduce the demand for oil and gas and deteriorate the oil and natural prices. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion of our fiscal 2021 operating results and potential impact on fiscal 2022 operating results due to commodity price changes. Oil and Gas Operations As of March 31, 2021, oil constituted approximately 73% of our oil and gas revenues and approximately 49% of our total proved reserves for fiscal 2021. Revenues from oil and gas royalty interests accounted for approximately 22% of our oil and gas revenues for fiscal 2021. There are two primary areas in which the Company is focused, 1) the Delaware Basin located in the Western portion of the Permian Basin including Lea and Eddy Counties, New Mexico and Loving County, Texas and 2) the Midland Basin located in the Eastern portion of the Permian Basin including Reagan, Upton, Midland, Martin, Howard and Glasscock Counties, Texas. The Permian Basin in total accounts for 80% of our discounted future net cash flows from proved reserves and 86% of our gross revenues. The Delaware Basin properties, encompassing 31,224 gross acres, 210 net acres, 526 gross producing wells and 3 net wells account for approximately 52% of our discounted future net cash flows from proved reserves as of March 31, 2021. For fiscal 2021, these properties accounted for 66% of our gross revenues and 76% of our net revenues. Of these discounted future net cash flows from proved reserves, approximately 11% are attributable to proven undeveloped reserves which will be developed through new drilling. The Midland Basin properties, encompassing 97,640 gross acres, 263 net acres, 981 gross producing wells and 3 net wells account for approximately 14% of our discounted future net cash flows from proved reserves as of March 31, 2021. For fiscal 2021, these properties accounted for 14% of our gross revenues and 13% of our net revenues. Of these discounted future net cash flows from proved reserves, approximately 9% are attributable to proven undeveloped reserves which will be developed through new drilling. 5 Gomez Gas Field properties, encompassing 13,058 gross acres, 72 net acres, 27 gross wells and .13 net wells in Pecos County, Texas, account for approximately 13% of our discounted future net cash flows from proved reserves as of March 31, 2021. For fiscal 2021, these properties accounted for 3% of our gross revenues and 2% of our net revenues. All of these properties, except for one, are royalty interests. Of these discounted future net cash flows from proved reserves, approximately 10% are attributable to proven undeveloped reserves which will be developed through new drilling in the horizontal Wolfcamp. Mexco believes its most important properties for future development by horizontal drilling and hydraulic fracturing area are located in Lea and Eddy Counties, New Mexico of the Delaware Basin and the Midland Basin in Midland, Reagan and Upton Counties, Texas. For more on these and other operations in this area see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources Commitments”. We own partial interests in approximately 6,400 producing wells all of which are located within the United States in the states of Texas, New Mexico, Oklahoma, Louisiana, Alabama, Mississippi, Arkansas, Wyoming, Kansas, Colorado, Montana, Virginia, North Dakota, and Ohio. Additional information concerning these properties and our oil and gas reserves is provided below. The following table indicates our oil and gas production in each of the last five years: Year Oil(Bbls) Gas (Mcf) 2021 50,327 324,205 2020 44,301 294,007 2019 35,359 295,133 2018 34,743 318,774 2017 34,689 356,268 Competition and Markets The oil and gas industry is a highly competitive business. Competition for oil and gas reserve acquisitions is significant. We may compete with major oil and gas companies, other independent oil and gas companies and individual producers and operators, some of which have financial and personnel resources substantially in excess of those available to us. As a result, we may be placed at a competitive disadvantage. Competitive factors include price, contract terms and types and quality of service, including pipeline distribution. The price for oil and gas is widely followed and is generally subject to worldwide market factors. Our ability to acquire and develop additional properties in the future will depend upon our ability to evaluate and select suitable properties and to consummate transactions in this highly competitive environment in a timely manner. In addition, the oil and gas industry as a whole also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers. The price and availability of alternative energy sources could adversely affect our revenue. Market factors affect the quantities of oil and natural gas production and the price we can obtain for the production from our oil and natural gas properties. Such factors include: the extent of domestic production; the level of imports of foreign oil and natural gas; the general level of market demand on a regional, national and worldwide basis; domestic and foreign economic conditions that determine levels of industrial production; political events in foreign oil-producing regions like the crude oil price disputes between Saudi Arabia and Russia; and variations in governmental regulations including environmental, energy conservation and tax laws or the imposition of new regulatory requirements upon the oil and natural gas industry. The market for our oil, gas and natural gas liquids production depends on factors beyond our control including: national and international pandemics like the COVID-19; domestic and foreign political conditions; the overall level of supply of and demand for oil, gas and natural gas liquids; the price of imports of oil and gas; weather conditions; the price and availability of alternative fuels; the proximity and capacity of gas pipelines and other transportation facilities; and overall economic conditions. 6 Major Customers We made sales that amounted to 10% or more of revenues as follows for the years ended March 31: 2021 2020 Company A 66 % 52 % Historically, the Company has not experienced significant credit losses on our oil and gas accounts and management is of the opinion that significant credit risk does not exist. Because a ready market exists for oil and gas production, we do not believe the loss of any individual customer would have a material adverse effect on our financial position or results of operations. Environmental Regulation The exploration and development of crude oil and natural gas properties are subject to existing stringent and complex federal, state and local laws (including case law) and regulations governing health, safety, environmental quality and pollution control. Failure to comply with these laws, rules and regulations, however, may result in the assessment of administrative, civil or criminal penalties; the imposition of investigatory or remedial obligations; and the issuance of injunctions limiting or preventing some or all of the operations on the properties in which the Company owns an interest. Under certain environmental laws and regulations, the operators of the Company properties could be subject to strict, joint and several liability for the removal or remediation of property contamination, whether at a drill site or a waste disposal facility, even when the operators did not cause the contamination or their activities were in compliance with all applicable laws at the time the actions were taken. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), also known as the “superfund” law, for example, imposes liability, regardless of fault or the legality of the original conduct, on certain classes of persons for releases into the environment of a “hazardous substance.” Liable persons may include the current or previous owner and operator of a site where a hazardous substance has been disposed and persons who arranged for the disposal of a hazardous substance at a site. Under CERCLA and similar statutes, government authorities or private parties may take actions in response to threats to the public health or the environment or sue responsible persons for the associated costs. In the course of operations, the working interest owner and/or the operator of the Company properties may have generated and may generate materials that could trigger cleanup liabilities. In addition, the Company properties have produced oil and/or natural gas for many years, and previous operators may have disposed or released hydrocarbons, wastes or hazardous substances at the Company properties. The operator of the Company properties or the working interest owners may be responsible for all or part of the costs to clean up any such contamination. Although the Company is not the operator of such properties, its ownership of the properties could cause it to be responsible for all or part of such costs to the extent CERCLA or any similar statute imposes responsibility on such parties as “owners.” Various state governments and regional organizations comprising state governments already have enacted legislation and promulgated rules restricting greenhouse gases (“GHGs”) emissions or promoting the use of renewable energy, and additional such measures are frequently under consideration. Although it is not possible at this time to estimate how potential future requirements addressing GHG emissions would impact operations on the Company properties and revenue, either directly or indirectly, any future federal, state or local laws or implementing regulations that may be adopted to address GHG emissions could require the operators of our properties to incur new or increased costs to obtain permits, operate and maintain equipment and facilities, install new emission controls, acquire allowances to authorize GHG emissions, pay taxes related to GHG emissions or administer a GHG emissions program. Regulation of GHGs could also result in a reduction in demand for and production of oil and natural gas. Additionally, to the extent that unfavorable weather conditions are exacerbated by global climate change or otherwise, the Company properties may be adversely affected to a greater degree than previously experienced. We did not incur any material capital expenditures for remediation or pollution control activities for the year ended March 31, 2021. Additionally, as of the date of this report, we are not aware of any environmental issues or claims that will require material capital expenditures during fiscal 2022. 7 Title to Properties The leasehold properties we own are subject to royalty, overriding royalty and other outstanding interests customary in the industry. The properties may be subject to burdens such as liens incident to operating agreements and current taxes, development obligations under oil and gas leases and other encumbrances, easements and restrictions. We do not believe any of these burdens will materially interfere with the use of these properties. Prior to drilling of an oil and natural gas well, it is normal practice in our industry for the person or company acting as the operator of the well to obtain a preliminary title review to ensure there are no obvious defects in title to the well. Frequently, as a result of such examinations, certain curative work must be done to correct defects in the marketability of the title, and such curative work entails expense. Our operators’ failure to cure any title defects may delay or prevent us from utilizing the associated mineral interest. We believe the title to our properties is good and defensible in accordance with standards generally acceptable in the oil and gas industry subject to such exceptions that, in the opinion of counsel employed in the various areas in which we have activities, are not so material as to detract substantially from the use of such properties. Substantially all of our properties are currently mortgaged under a deed of trust to secure funding through a credit facility. Insurance Our operations are subject to all the risks inherent in the exploration for and development and production of oil and gas including blowouts, fires and other casualties. We maintain insurance coverage customary for operations of a similar nature, but losses could arise from uninsured risks or in amounts in excess of existing insurance coverage. Executive Officers The following table sets forth certain information concerning the executive officers of the Company as of March 31, 2021. Name Age Position Nicholas C. Taylor 83 Chairman and Chief Executive Officer Tamala L. McComic 52 President, Chief Financial Officer, Treasurer, and Assistant Secretary Donna Gail Yanko 76 Vice President and Secretary Set forth below is a description of the principal occupations during at least the past five years of each executive officer of the Company. Nicholas C. Taylor was elected Chairman of the Board and Chief Executive Officer of the Company in September 2011 and continues to serve in such capacity on a part time basis, as required. He served as Chief Executive Officer, President and Director of the Company from 1983 to 2011. From July 1993 to the present, Mr. Taylor has been involved in the independent practice of law and other business activities. In November 2005 he was appointed by the Speaker of the House to the Texas Ethics Commission and served until February 2010. Tamala L. McComic, a Certified Public Accountant and Chartered Global Management Accountant, became Controller for the Company in July 2001 and was elected President and Chief Financial Officer in September 2011. She served the Company as Executive Vice President and Chief Financial Officer from 2009 to 2011 and Vice President and Chief Financial Officer from 2003 to 2009. Prior thereto, Ms. McComic served as Treasurer and Assistant Secretary of the Company. Donna Gail Yanko was appointed to the position of Vice President of the Company in 1990. She has also served as Corporate Secretary since 1992 and from 1986 to 1992 was Assistant Secretary. From 1986 to 2015, on a part-time basis, she assisted the Chairman of the Board of the Company in his personal business activities. Ms. Yanko also served as a director of the Company from 1990 to 2008. 8 Employees As of March 31, 2021, we had two full-time and three part-time employees. We believe that relations with these employees are generally satisfactory. From time to time, we utilize the services of independent geological, land and engineering consultants on a limited basis and expect to continue to do so in the future. Office Facilities Our principal offices are located at 415 W. Wall, Suite 475, Midland, Texas 79701 and our telephone number is (432) 682-1119. We believe our facilities are adequate for our current operations and future needs. Access to Company Reports Mexco Energy Corporation files annual, quarterly and current reports, proxy statements and other information with the SEC. The SEC maintains an internet website (www.sec.gov) that contains annual, quarterly and current reports, proxy statements and other information that issuers, including Mexco, file electronically with the SEC. We also maintain an internet website at www.mexcoenergy.com. In the Investor Relations section, our website contains our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other reports and amendments to those reports as soon as reasonably practicable after such material is electronically filed with the SEC. Information on our website is not incorporated by reference into this Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. Additionally, our Code of Business Conduct and Ethics and the charters of our Audit Committee, Compensation Committee and Nominating Committee are posted on our website. Any of these corporate documents as well as any of the SEC filed reports are available in print free of charge to any stockholder who requests them. Requests should be directed to our corporate Secretary by mail to P.O. Box 10502, Midland, Texas 79702 or by email to mexco@sbcglobal.net.