Item 2. Properties
ITEM
2. PROPERTIES
Our
properties consist primarily of oil and gas wells and our ownership in leasehold acreage, both developed and undeveloped. As of March
31, 2023, we had interests in approximately 6,400 gross (18.5 net) producing oil and gas wells and owned leasehold mineral, royalty and
other interests in approximately 544,000 gross (2,768 net) acres.
15
Oil
and Natural Gas Reserves
In
accordance with current SEC rules, the average prices used in computing reserves at March 31, 2023 were $92.02 per bbl of oil compared
to $74.52 in 2022, an increase of 23%, and $5.68 per mcf of natural gas compared to $4.60 in 2022, an increase of 23%, such prices are
based on the 12-month unweighted arithmetic average market prices for sales of oil and natural gas on the first calendar day of each
month during fiscal 2023. The benchmark price of $87.45 per bbl of oil at March 31, 2023 versus $71.72 at March 31, 2022, was adjusted
by lease for gravity, transportation fees and market differentials and did not give effect to derivative transactions. The benchmark
price of $5.96 per mcf of natural gas at March 31, 2023 versus $4.09 at March 31, 2022, was adjusted by lease for BTU content, transportation
fees and market differentials.
For
information concerning our costs incurred for oil and gas operations, net revenues from oil and gas production, estimated future net
revenues attributable to our oil and gas reserves, present value of future net revenues discounted at 10% and changes therein, see Notes
to the Company’s consolidated financial statements.
Proved
reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods. Proved
undeveloped reserves are proved reserves that are expected to be recovered from new wells drilled to known reservoirs on undrilled acreage
for which the existence and recoverability of such reserves can be estimated with reasonable certainty, or from existing wells on which
a relatively major expenditure is required to establish production.
The
engineering report with respect to Mexco’s estimates of proved oil and gas reserves as of March 31, 2023 and 2022 is based on evaluations
prepared by Russell K. Hall and Associates, Inc. Environmental Engineering Consultants, based in Midland, Texas (“Hall and Associates”),
a summary of which is filed as Exhibit 99.1 to this annual report.
Management
maintains internal controls designed to provide reasonable assurance that the estimates of proved reserves are computed and reported
in accordance with rules and regulations provided by the SEC. As stated above, Mexco retained Hall and Associates to prepare estimates
of our oil and gas reserves. Management works closely with this firm, and is responsible for providing accurate operating and technical
data to it. Our Chief Financial Officer who has over 25 years experience in the oil and gas industry reviews the final reserves estimate
and consults with a degreed geological consultant with extensive geological experience and if necessary, discusses the process used and
findings with Alan Neal, the technical person at Hall and Associates responsible for evaluating the proved reserves covered by this report.
Mr. Neal is a member of the Society of Petroleum Engineers and has over 35 years of experience in the oil and gas industry. Our Chairman
and Chief Executive Officer who has over 45 years of experience in the oil and gas industry also reviews the final reserves estimate.
Numerous
uncertainties exist in estimating quantities of proved reserves. Reserve estimates are imprecise and subjective and may change at any
time as additional information becomes available. Furthermore, estimates of oil and gas reserves are projections based on engineering
data. There are uncertainties inherent in the interpretation of this data as well as the projection of future rates of production. The
accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation. Actual
future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil
and gas reserves will most likely vary from the assumptions and estimates. Any significant variance could materially affect the estimated
quantities and value of our oil and gas reserves, which in turn may adversely affect our cash flow, results of operations and the availability
of capital resources.
Per
the current SEC rules, the prices used to calculate our proved reserves and the present value of proved reserves set forth herein are
made using the 12-month unweighted arithmetic average of the first-day-of-the-month price. All prices are held constant throughout the
life of the properties. Actual future prices and costs may be materially higher or lower than those as of the date of the estimate. The
timing of both the production and the expenses with respect to the development and production of oil and gas properties will affect the
timing of future net cash flows from proved reserves and their present value. Except to the extent that we acquire additional properties
containing proved reserves or conduct successful exploration and development activities, or both, our proved reserves will decline as
reserves are produced.
Our
estimated proved oil and gas reserves and present value of estimated future net revenues from proved oil and gas reserves in the periods
ended March 31 are summarized below.
16
PROVED
RESERVES
March
31,
2023
2022
Oil (Bbls):
Proved developed – Producing
451,000
391,060
Proved developed – Non-producing
35,770
37,620
Proved undeveloped
240,060
380,550
Total
726,830
809,230
Natural gas (Mcf):
Proved developed – Producing
3,826,370
3,454,310
Proved developed – Non-producing
145,000
129,160
Proved undeveloped
978,010
1,258,220
Total
4,949,380
4,841,690
Total net proved
reserves (BOE) (1)
1,551,725
1,616,180
PV-10 Value (2)
$ 39,473,000
$ 30,777,000
Present value of future
income tax discounted at 10%
(6,658,000 )
(4,857,000 )
Standardized measure
of discounted future net cash flows (3)
$ 32,815,000
$ 25,920,000
Prices used in Calculating Reserves: (4)
Natural gas (per Mcf)
$ 5.68
$ 4.60
Oil (per Bbl)
$ 92.02
$ 74.52
(1) These
reserve estimates do not include the Company’s interest in two LLCs referred to in Item
1. Business – Company Profile on page 4 hereto. The first LLC has returned $226,725 and 76% of the total investment since inception in fiscal 2020.
(2) The
PV-10 Value represents the discounted future net cash flows attributable to our proved oil
and gas reserves before income tax, discounted at 10% per annum, which is the most directly
comparable GAAP financial measure. PV-10 is relevant and useful to investors because it presents
the discounted future net cash flows attributable to our estimated net proved reserves prior
to taking into account future corporate income taxes. Further, investors may utilize the
measure as a basis for comparison of the relative size and value of our reserves to other
companies. We use this measure when assessing the potential return on investment related
to our oil and natural gas properties. Our reconciliation of this non-GAAP financial measure
is shown in the table as the PV-10, less future income taxes, discounted at 10% per annum,
resulting in the standardized measure of discounted future net cash flows. The standardized
measure of discounted future net cash flows represents the present value of future cash flows
attributable to our proved oil and natural gas reserves after income tax, discounted at 10%.
(3) In
accordance with SEC requirement, the standardized measure of discounted future net cash flows
was computed by applying 12-month first day of the month average prices for oil and gas during
the fiscal year to the estimated future production of proved oil and gas reserves, less estimated
future expenditures (based on year-end costs) to be incurred in developing and producing
the proved reserves, less estimated future income tax expenses (based on year-end statutory
tax rates, with consideration of future tax rates already legislated) to be incurred on pretax
net cash flows less tax basis of the properties and available credits, and assuming continuation
of existing economic conditions.
(4) These
prices reflect adjustment by lease for quality, transportation fees and market differentials.
During
fiscal 2023, we added proved reserves of 101 thousand BOE (“MBOE”) through extensions and discoveries, added 52 MBOE through
acquisitions, subtracted 54 MBOE for downward revisions of previous estimates. Such downward revisions are primarily the result of reserves
written off due to the five-year limitation and the change in the timing of new development. They are primarily royalty interests on
leases in Loving, Pecos and Ward Counties, Texas which are held by production and still in place to be developed in the future.
During
the fiscal year ending March 31, 2023, we had a working or royalty interest in the development of 59 wells converting reserves of approximately
186,000 BOE from proved undeveloped to proved developed – producing with capital cost of approximately $3,612,000.
17
Oil
and gas prices significantly impact the calculation of the PV-10 and the standardized measure of discounted future net cash flows. The
present value of future net cash flows does not purport to be an estimate of the fair market value of the Company’s proved reserves.
An estimate of fair value would also take into account, among other things, anticipated changes in future prices and costs, the expected
recovery of reserves in excess of proved reserves and a discount factor more representative of the time value of money and the risks
inherent in producing oil and gas. Future prices received for production and costs may vary, perhaps significantly, from the prices and
costs assumed for purposes of these estimates. The 10% discount factor used to calculate present value, which is required by Financial
Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 932, “Extractive Activities
– Oil and Gas”, may not necessarily be the most appropriate discount rate. The present value, no matter what discount rate
is used, is materially affected by assumptions as to timing of future production, which may prove to be inaccurate.
We
have not filed any other oil or gas reserve estimates or included any such estimates in reports to other federal or foreign governmental
authority or agency during the year ended March 31, 2023, and no major discovery is believed to have caused a significant change in our
estimates of proved reserves since that date.
Drilling
Activities
The
following table sets forth our drilling activity in wells in which we own a working interest for the years ended March 31:
Year
Ended March 31,
2023
2022
Gross
Net
Gross
Net
Exploratory Wells
Beginning wells in progress
-
-
-
-
Wells spud
-
-
-
-
Successful
wells
-
-
-
-
Ending
wells in progress
-
-
-
-
Development Wells
Beginning wells
in progress
11
.04
12
.06
Wells spud
54
.36
44
.13
Successful
wells
(44 )
(.35 )
(45 )
(.15 )
Ending
wells in progress
21
.05
11
.04
The
information contained in the foregoing table should not be considered indicative of future drilling performance, nor should it be assumed
that there is any necessary correlation between the number of productive wells drilled and the amount of oil and gas that may ultimately
be recovered by us.
In
addition to the working interests mentioned above, other operators drilled 85 gross wells (.04 net wells) on company-owned minerals and
royalties at no expense to the Company. We expect the production of our mineral interests will increase as operators continue to drill,
complete and develop our acreage. We expect to capitalize on this development, which requires no capital expenditure funding from us,
and believe the anticipated aggregate royalty receipts will enable us to grow our cash flows. A number of the horizontal wells in which
the Company participates involve longer lateral which are more efficient and have greater estimated ultimate recovery.
Productive
Wells and Acreage
Productive
wells consist of producing wells and wells capable of production, including gas wells awaiting pipeline connections. Wells that are completed
in more than one producing zone are counted as one well. As of March 31, 2023, we held an interest in approximately 6,400 gross (18.5
net) productive wells, including approximately 5,200 wells in which we held an overriding or royalty interest and 1,100 wells in which
we held a working interest.
18
A
gross acre is an acre in which an interest is owned. A net acre is deemed to exist when the sum of fractional ownership interests in
gross acres equals one. The number of net acres is the sum of the fractional interests owned in gross acres. The following table sets
forth the approximate developed acreage in which we held a leasehold mineral or other interest as of March 31, 2023:
Acreage
Gross
Net
Texas
348,600
1,586
Oklahoma
70,900
884
Louisiana
35,300
25
New Mexico
30,600
185
North Dakota
22,600
29
Ohio
14,500
1
Kansas
8,500
41
Montana
5,000
1
Wyoming
3,800
5
Arkansas
1,600
5
Colorado
1,100
1
Alabama
1,000
2
Mississippi
700
2
Virginia
100
1
Total
544,300
2,768
Net
Production, Unit Prices and Costs
The
following table summarizes our net oil and natural gas production, the average sales price per barrel (“bbl”) of oil and
per thousand cubic feet (“mcf”) of natural gas produced and the average production (lifting) cost per unit of production
for the years ended March 31:
Years
Ended March 31,
2023
2022
Oil (a):
Production
(Bbls)
73,968
61,689
Revenue
$ 6,522,163
$ 4,685,094
Average Bbls per day (d)
203
169
Average sales price per Bbl
$ 88.18
$ 75.95
Gas (b):
Production (Mcf)
534,363
393,841
Revenue
$ 2,858,460
$ 1,840,170
Average Mcf per day (d)
1,464
1,079
Average sales price per Mcf
$ 5.35
$ 4.67
Total BOE (c)
163,029
127,329
Production costs:
Production expenses:
$ 1,039,893
$ 778,308
Production expenses per
BOE
$ 6.38
$ 6.11
Production expenses per
sales dollar
$ 0.11
$ 0.12
Production and ad valorem
taxes:
$ 679,826
$ 502,804
Production and ad valorem
taxes per BOE
$ 4.17
$ 3.95
Production and ad valorem
taxes per sales dollar
$ 0.07
$ 0.08
Total oil and gas revenue
$ 9,380,623
$ 6,525,264
(a)
Includes condensate.
(b)
Includes natural gas products.
(c)
Natural gas production is
converted to oil production using a ratio of six Mcf to one Bbl of oil.
(d)
Calculated on a 365 day year.