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, 2024, we had interests in approximately 6,800 gross (25.7 net) producing oil and gas wells and owned leasehold mineral, royalty and
other interests in approximately 579,000 gross (2,709 net) acres.
Oil
and Natural Gas Reserves
In
accordance with current SEC rules, the average prices used in computing reserves at March 31, 2024 were $76.88 per bbl of oil compared
to $92.02 in 2023, a decrease of 16%, and $2.75 per mcf of natural gas compared to $5.68 in 2023, a decrease of 52%, 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 2024. The benchmark price of $73.96 per bbl of oil at March 31, 2024 versus $87.45 at March 31, 2023, was adjusted
by lease for gravity, transportation fees and market differentials and did not give effect to derivative transactions. The benchmark
price of $2.45 per mcf of natural gas at March 31, 2024 versus $5.96 at March 31, 2023, 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.
16
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, 2024 and 2023 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 26 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 36 years of experience in the oil and gas industry. Our Chairman
and Chief Executive Officer who has over 46 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.
17
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.
PROVED
RESERVES
March 31,
2024
2023
Oil (Bbls):
Proved developed – Producing
394,000
451,000
Proved developed – Non-producing
50,620
35,770
Proved undeveloped
346,330
240,060
Total
790,950
726,830
Natural gas (Mcf):
Proved developed – Producing
3,346,460
3,826,370
Proved developed – Non-producing
219,780
145,000
Proved undeveloped
970,880
978,010
Total
4,537,120
4,949,380
Total net proved reserves (BOE) (1)
1,547,127
1,551,725
PV-10 Value (2)
$ 29,078,000
$ 39,473,000
Present value of future income tax discounted at 10%
(4,450,000 )
(6,658,000 )
Standardized measure of discounted future net cash flows (3)
$ 24,628,000
$ 32,815,000
Prices used in Calculating Reserves: (4)
Natural gas (per Mcf)
$ 2.75
$ 5.68
Oil (per Bbl)
$ 76.88
$ 92.02
(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 $276,098 and 92% 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 2024, we added proved reserves of 272 thousand BOE (“MBOE”) through extensions and discoveries, added 44 MBOE through
acquisitions, subtracted 163 MBOE for downward revisions of previous estimates. Such downward revisions are primarily attributable to
a decrease in crude oil and natural gas prices and partially the result of reserves written off due to the five-year limitation and the
change in the timing of new development. The reserves written off were primarily royalty interests on leases in DeSoto Parish, Louisiana and Karnes County,
Texas which are held by production and still in place to be developed in the future.
During
the fiscal year ending March 31, 2024, we had a working or royalty interest in the development of 43 wells converting reserves of approximately
62,000 BOE from proved undeveloped to proved developed – producing with capital cost of approximately $940,000.
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, 2024, and no major discovery is believed to have caused a significant change in our
estimates of proved reserves since that date.
18
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,
2024
2023
Gross
Net
Gross
Net
Exploratory Wells
Beginning wells in progress
-
-
-
-
Wells spud
-
-
-
-
Successful wells
-
-
-
-
Ending wells in progress
-
-
-
-
Development Wells
Beginning wells in progress
21
.05
11
.04
Wells spud
48
.22
54
.36
Successful wells
(53 )
(.09 )
(44 )
(.35 )
Ending wells in progress
16
.17
21
.05
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 101 gross wells (.02 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, 2024, we held an interest in approximately 6,800 gross (25.7
net) productive wells, including approximately 5,700 wells in which we held an overriding or royalty interest and 1,100 wells in which
we held a working interest.
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, 2024:
Acreage
Gross
Net
Texas
373,500
1,531
Oklahoma
69,300
815
Louisiana
38,900
87
New Mexico
31,000
184
North Dakota
22,400
23
Ohio
20,300
1
Kansas
8,500
41
Montana
5,000
1
Wyoming
3,800
5
Colorado
3,000
11
Arkansas
1,600
5
Alabama
1,000
2
Mississippi
600
2
Virginia
100
1
Total
579,000
2,709
19
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,
2024
2023
Oil (a):
Production (Bbls)
69,999
73,968
Revenue
$ 5,348,257
$ 6,522,163
Average Bbls per day (d)
192
203
Average sales price per Bbl
$ 76.40
$ 88.18
Gas (b):
Production (Mcf)
502,879
534,363
Revenue
$ 1,114,390
$ 2,858,460
Average Mcf per day (d)
1,378
1,464
Average sales price per Mcf
$ 2.22
$ 5.35
Total BOE (c)
153,812
163,029
Production costs:
Production expenses:
$ 1,029,279
$ 1,039,893
Production expenses per BOE
$ 6.69
$ 6.38
Production expenses per sales dollar
$ 0.16
$ 0.11
Production and ad valorem taxes:
$ 497,193
$ 679,826
Production and ad valorem taxes per BOE
$ 3.23
$ 4.17
Production and ad valorem taxes per sales dollar
$ 0.08
$ 0.07
Total oil and gas revenue
$ 6,462,647
$ 9,380,623
(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.