MEXCO ENERGY CORP 10-Q

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 include statements regarding our plans, beliefs or current expectations and may be signified by the words “could”, “should”, “expect”, “project”, “estimate”, “believe”, “anticipate”, “intend”, “budget”, “plan”, “forecast”, “predict” and other similar expressions. Forward-looking statements appear throughout this Form 10-Q with respect to, among other things: profitability; planned capital expenditures; estimates of oil and gas production; future project dates; estimates of future oil and gas prices; estimates of oil and gas reserves; our future financial condition or results of operations; and our 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 do not undertake to update, revise or correct any of the forward-looking information. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Form 10-K. 11 Liquidity and Capital Resources. Historically, we have funded our operations, acquisitions, exploration and development expenditures from cash generated by operating activities, bank borrowings, sales of non-core properties and issuance of common stock. Our primary financial resource is our base of oil and gas reserves. We have pledged our producing oil and gas properties to secure our credit facility. We do not have any delivery commitments to provide a fixed and determinable quantity of its oil and gas under any existing contract or agreement. Our long-term strategy is on increasing profit margins while concentrating on obtaining reserves with low cost operations by acquiring and developing oil and gas properties with potential for long-lived production. We focus our efforts on the acquisition of royalties and working interests and non-operated properties in areas with significant development potential. At December 31, 2021, we had working capital of $1,443,678 compared to working capital of $618,960 at March 31, 2021, an increase of $824,718 primarily due to the reasons set forth below. Cash Flows Changes in the net funds provided by or (used in) each of our operating, investing and financing activities are set forth in the table below: For the Nine Months Ended December 31, 2021 2020 % Difference Net cash provided by operating activities 2,728,586 372,863 632 % Net cash used in investing activities (1,021,849 ) (818,597 ) 25 % Net cash (used in) provided by financing activities (884,360 ) 452,369 (295 )% Cash Flow Provided by Operating Activities. Cash flow from operating activities is primarily derived from the production of our crude oil and natural gas reserves and changes in the balances of non-cash accounts, receivables, payables or other non-energy property asset account balances. Cash flow provided by our operating activities for the nine months ended December 31, 2021 was $2,728,586 in comparison to $372,863 for the nine months ended December 31, 2020. This increase of $2,355,723 in our cash flow operating activities consisted of an increase in our non-cash expenses of $197,738; an increase in our accounts receivable of $4,132; and, an increase in our net income for the current nine months of $2,118,279 compared to a net loss the same nine month period of the prior year. Variations in cash flow from operating activities may impact our level of exploration and development expenditures. Our expenditures in operating activities consist primarily of lease operating expenses and production expenses. Our expenses also consist of employee compensation, accounting, insurance and other general and administrative expenses that we have incurred in order to address normal and necessary business activities of a public company in the crude oil and natural gas production industry. Cash Flow Used in Investing Activities. Cash flow from investing activities is derived from changes in oil and gas property balances. For the nine months ended December 31, 2021, we had net cash of $1,021,849 used for additions to oil and gas properties compared to $818,597 for the nine months ended December 31, 2020. Cash Flow Provided by Financing Activities. Cash flow from financing activities is derived from our changes in long-term debt and in equity account balances. Cash flow used in our financing activities was $884,360 for the nine months ended December 31, 2021 compared to cash flow provided by our financing activities of $452,369 for the nine months ended December 31, 2020. During the nine months ended December 31, 2021 and 2020, we received advances of $275,000 and $680,000, respectively, from our credit facility. During the nine months ended December 31, 2021 and 2020, we made payments of $1,455,000 and $375,000, respectively, on the credit facility. For the nine months ended December 31, 2021 and 2020, we received proceeds of $295,640 and $78,795, respectively, from the exercise of employee and director stock options. For the nine months ended December 31, 2020, we received $68,574 under the paycheck protection program (PPP). Accordingly, net cash increased $822,377, leaving cash and cash equivalents on hand of $880,190 as of December 31, 2021. 12 Oil and Natural Gas Property Development. New Participations in Fiscal 2022. The Company currently plans to participate in the drilling and completion of 43 horizontal wells at an estimated aggregate cost of approximately $1,200,000 for the fiscal year ending March 31, 2022. All of these horizontal wells are in the Delaware Basin located in the western portion of the Permian Basin in Lea and Eddy Counties, New Mexico and Reeves County, Texas. In November 2021, Mexco expended approximately $92,000 to participate in the completion of four horizontal wells in the Wolfcamp Sand formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. These wells were subsequently completed in January 2022 with initial average production rates of 1,204 barrels of oil, 3,369 barrels of water and 3,141,000 cubic feet of gas per day, or, 1,728 barrels of oil equivalent per day. Mexco’s working interest in these wells is .37%. Also in November 2021, Mexco expended approximately $59,000 to participate in the drilling of two horizontal wells in the 3 rd Bone Spring formation and two horizontal wells in the Wolfcamp Sand formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. Mexco’s working interest in these wells is .37%. In October 2021, Mexco expended approximately $126,000 to participate in the drilling of four horizontal wells in the Wolfcamp Sand formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. Mexco’s working interest in these wells is .52%. During the nine months ended December 31, 2021, Mexco expended approximately $180,000 to participate in the drilling and completion of four horizontal wells in the Lower Wolfcamp Shale of the Delaware Basin in Eddy County, New Mexico. Mexco’s working interest in these wells is .44%. Also during the nine months ended December 31, 2021, Mexco expended $31,500 for its share to participate in the drilling and completion of two horizontal wells in the 3 rd Bone Spring Sand formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. These wells were completed in August 2021 with initial average production rates of 1,294 barrels of oil, 3,345 barrels of water and 3,124,000 cubic feet of gas per day, or, 1,815 barrels of oil equivalent per day. Mexco’s working interest in these wells is .1%. In September 2021, Mexco expended approximately $43,000 to participate in the drilling of three horizontal wells in the 2 nd Bone Spring formation and two horizontal wells in the 3 rd Bone Spring formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. Mexco’s working interest in these wells is an average of approximately .22%. These wells have been drilled and are awaiting completion operations. During the nine months ended December 31, 2021, Mexco expended approximately $140,400 to participate in the drilling and completion of four horizontal wells in the Wolfcamp Sand formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico. These wells were subsequently completed in January 2022 with initial average production rates of 1,008 barrels of oil, 3,563 barrels of water and 2,980,000 cubic feet of gas per day, or, 1,505 barrels of oil equivalent per day. Mexco’s working interest in these wells is .37%. In August 2021, Mexco expended approximately $52,000 to participate in the drilling of two horizontal wells in the Bone Spring formation of the Delaware Basin located in the western portion of the Permian Basin in Reeves County, Texas. Mexco working interest in these wells is approximately .6%. These wells have been drilled and are being completed as of December 2021. During the quarter ended June 30, 2021, Mexco participated in the drilling and completion of two horizontal wells in the Wolfcamp formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico with aggregate costs of approximately $88,000. These wells were completed at the end of June 2021 with initial average production rates of 1,184 barrels of oil, 4,380 barrels of water and 1,818,000 cubic feet of gas per day, or 1,444 barrels of oil equivalent per day. Mexco’s working interest in these wells is .56%. 13 Completion of Wells Drilled in Fiscal 2021. The Company expended approximately $165,000 for the additional completion costs of 12 horizontal wells located in Eddy and Lea Counties, New Mexico that the Company participated in drilling during fiscal 2021. The Company participated in the completion of two horizontal wells in the Wolfcamp formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico with aggregate costs of approximately $108,000. These wells were completed at the end of June 2021 and beginning of July 2021 with initial average production rates of 1,046 barrels of oil, 3,214 barrels of water and 2,146,000 cubic feet of gas per day, or 1,403 barrels of oil equivalent per day. Mexco’s working interest in these wells is 1.2%. The Company participated in the completion of two horizontal wells in the Wolfcamp formation of the Delaware Basin located in the western portion of the Permian Basin in Lea County, New Mexico with aggregate costs of approximately $55,000. These wells were completed at the end of June 2021 with initial average production rates of 774 barrels of oil, 2,648 barrels of water and 973,000 cubic feet of gas per day, or 913 barrels of oil equivalent per day. Mexco’s working interest in these wells is .56%. We are participating in other projects and are reviewing 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 and, if appropriate, sales of non-core properties. Crude oil and natural gas generally remained volatile during the last year. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. For example, in the last twelve months, the NYMEX West Texas Intermediate (“WTI”) posted price for crude oil has ranged from a low of $43.60 per bbl in January 2021 to a high of $80.63 per bbl in October 2021. The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $2.43 per MMBtu in April 2021 to a high of $23.86 per MMBtu in February 2021. On December 31, 2021 the WTI posted price for crude oil was $71.19 per bbl and the Henry Hub spot price for natural gas was $3.82 per MMBtu. See Results of Operations below for realized prices. Contractual Obligations. We have no off-balance sheet debt or unrecorded obligations and have not guaranteed the debt of any other party. The following table summarizes our future payments we are obligated to make based on agreements in place as of December 31, 2021: Payments due in: Total less than 1 year 1 - 3 years over 3 years Contractual obligations: Leases (1) $ 150,453 $ 58,240 $ 92,213 $ - (1) The lease amount represents the monthly rent amount for our principal office space in Midland, Texas under a 38-month lease agreement effective May 15, 2018 and extended another 36 months to July 31, 2024. Of this total obligation for the remainder of the lease, our majority shareholder will pay $15,572 less than 1 year and $24,656 1-3 years for his portion of the shared office space. Results of Operations – Three Months Ended December 31, 2021 and 2020. For the quarter ended December 31, 2021, there was net income of $753,302 compared to $80,497 for the quarter ended December 31, 2020, a 836% increase as a result of an increase in operating revenues due to an increase in oil and gas production and prices partially offset by an increase in operating expenses that is further explained below. Oil and gas sales . Revenue from oil and gas sales was $1,573,984 for the third quarter of fiscal 2022, a 127% increase from $692,243 for the same period of fiscal 2021. This resulted from an increase in oil and natural gas prices and an increase in oil and natural gas production volumes. 2021 2020 % Difference Oil: Revenue $ 1,073,078 $ 520,261 106.3 % Volume (bbls) 14,142 13,004 8.8 % Average Price (per bbl) $ 75.88 $ 40.01 89.7 % Gas: Revenue $ 500,906 $ 171,982 191.3 % Volume (mcf) 91,534 82,688 10.7 % Average Price (per mcf) $ 5.47 $ 2.08 163.0 % 14 Production and exploration. Production costs were $291,068 for the third quarter of fiscal 2022, a 23% increase from $235,958 for the same period of fiscal 2021. This is primarily the result of an increase in production taxes and marketing charges as a result of the increase in oil and gas revenues. Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $268,018 for the third quarter of fiscal 2022, a 13% increase from $237,459 for the same period of fiscal 2021, primarily due to an increase in oil and gas production and a decrease in oil and gas reserves partially offset by a decrease in the full cost pool amortization base. General and administrative expenses. General and administrative expenses were $272,552 for the third quarter of fiscal 2022, a 41% increase from $193,288 for the same period of fiscal 2021. This was primarily due to an increase in employee compensation and shareholder services. Interest expense. Interest expense was $3,132 for the third quarter of fiscal 2022, a 79% decrease from $14,604 for the same period of fiscal 2021, due to a decrease in borrowings. Income taxes. There was no income tax expense for the quarter ended December 31, 2021 and the quarter ended December 31, 2020. The effective tax rate for the three months ended December 31, 2021 and December 31, 2020 was 0%. We are in a net deferred tax asset position and believe it is more likely than not that these deferred tax assets will not be realized. Results of Operations – Nine Months Ended December 31, 2021 and 2020. For the nine months ended December 31, 2021, there was a net income of $1,857,136 compared to a net loss of $261,143 for the nine months ended December 31, 2020. This was a result of an increase in operating revenues due to an increase in oil and gas production and prices partially offset by an increase in operating expenses that is further explained below. Oil and gas sales . Revenue from oil and gas sales was $4,370,720 for the nine months ended December 31, 2021, a 159% increase from $1,686,386 for the same period of fiscal 2021. This resulted from an increase in oil and natural gas prices and an increase in oil and natural gas production volumes. 2021 2020 % Difference Oil: Revenue $ 3,193,315 $ 1,307,588 144.2 % Volume (bbls) 45,857 37,681 21.7 % Average Price (per bbl) $ 69.64 $ 34.70 100.7 % Gas: Revenue $ 1,177,405 $ 378,798 210.8 % Volume (mcf) 274,204 251,094 9.2 % Average Price (per mcf) $ 4.29 $ 1.51 184.1 % Production and exploration. Production costs were $903,643 for the nine months ended December 31, 2021, a 45% increase from $624,741 for the nine months ended December 31, 2020. This increase is primarily the result of an increase in production taxes as a result of the increase in oil and gas revenues and an increase in lease operating expenses over last year due to numerous wells being shut-in during the month of May 2020 as well as cost cutting measures being implemented by the operators because of the depressed oil and gas prices during the pandemic. Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $812,398 for the nine months ended December 31, 2021, an 16% increase from $697,698 for the nine months ended December 31, 2020, primarily due to an increase in oil and gas production and a decrease in oil and gas reserves partially offset by a decrease in the full cost pool amortization base. General and administrative expenses. General and administrative expenses were $794,961 for the nine months ended December 31, 2021, a 25% increase from $634,526 for the nine months ended December 31, 2020. This was primarily due to an increase in bonuses and director’s fees which were significantly reduced last year due to the pandemic and an increase in accounting fees and employee stock option compensation expense. Interest expense. Interest expense was $23,381 for the nine months ended December 31, 2021, a 40% decrease from $39,174 for the nine months ended December 31, 2020 due to a decrease in borrowings. Income taxes. There was no income tax for the nine months ended December 31, 2021 and for the nine months ended December 31, 2020. The effective tax rate for the nine months ended December 31, 2021 and December 31, 2020 was 0%. We are in a net deferred tax asset position and believe it is more likely than not that these deferred tax assets will not be realized. 15