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 consolidated financial statements and notes thereto included in the Form 10-K. 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 our 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 royalty and working interests and non-operated properties in areas with significant development potential. At June 30, 2024, we had working capital of $3,038,700 compared to working capital of $3,259,200 at March 31, 2024, a decrease of $220,500 for 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 Three Months Ended June 30, 2024 2023 Change Net cash provided by operating activities $ 1,078,614 $ 1,616,195 $ (537,581 ) Net cash used in investing activities $ (717,387 ) $ (264,091 ) $ 453,296 Net cash used in financing activities $ (319,996 ) $ (211,388 ) $ 108,608 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 three months ended June 30, 2024 was $1,078,614 in comparison to $1,616,195 for the three months ended June 30, 2023. This decrease of $537,581 in our cash flow from operating activities consisted of an increase in our non-cash expenses of $51,324; a decrease in our accounts receivable of $424,805; an increase of $41,668 in our accounts payable and accrued expenses; a decrease of $14,068 in deferred income tax expense; and, a decrease in our net income for the current quarter of $174,575. Variations in cash flow from operating activities may impact our level of exploration and development expenditures. Our expenditures in operating activities consist primarily of drilling expenses, production expenses and engineering services. 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 three months ended June 30, 2024, we had net cash of $517,387 used for additions to oil and gas properties and a $200,000 investment in a limited liability company compared to $264,091 for the three months ended June 30, 2023. 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. Net cash flow used in our financing activities was $319,996 for the three months ended June 30, 2024 compared to cash flow provided by our financing activities of $211,388 for the three months ended June 30, 2023. During the three months ended June 30, 2024, we expended $209,000 to pay the regular annual dividend, expended $188,637 to purchase 13,766 shares of our stock for the treasury account, and received proceeds of $77,641 from the exercise of employee stock options. During the three months ended June 30, 2023, we expended $213,600 to pay the special dividend. Accordingly, net cash increased $41,231, leaving cash and cash equivalents on hand of $2,514,715 as of June 30, 2024. Oil and Natural Gas Property Development New Participations in Fiscal 2025. The Company currently plans to participate in the drilling and completion of 30 horizontal wells at an estimated cost of approximately $1,900,000 for the fiscal year ending March 31, 2025. Twenty-six of these wells are in the Delaware Basin located in the western portion of the Permian Basin in Lea and Eddy Counties, New Mexico. The remaining 4 wells are in Reagan County, Texas. In April 2024, Mexco expended approximately $80,000 to participate in the drilling of five horizontal wells in the Bone Spring formation of the Delaware Basin in Lea County, New Mexico. Page 13 In April 2024, Mexco expended approximately $127,800 to drill four horizontal wells in the Wolfcamp Sand formation of the Delaware Basin in Lea County, New Mexico. In October 2022, the Company made an approximately 2% equity investment commitment in a limited liability company amounting to $2,000,000 of which $1,000,000 has been funded as of June 30, 2024. The limited liability company is capitalized at approximately $100 million to purchase mineral interests in the Utica and Marcellus areas in the state of Ohio. Subsequently, in July 2024, the Company funded another $200,000 toward this investment. To date, this LLC has returned $98,637 or 8% of the total investment. Completion of Wells Drilled in Fiscal 2024. The Company also expects to expend approximately $300,000 in the completion of 19 horizontal wells in which the Company participated during fiscal 2024. The Company expended approximately $90,000 for the completion costs of two horizontial wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico that the Company participated in drilling during fiscal 2024. Mexco’s working interest in these wells is .53%. Subsequently, in July 2024, these wells were completed with initial average production rates of 1,402 barrels of oil, 2,009 barrels of water and 2,168,000 cubic feet of gas per day, or 1,763 BOE per day. Five horizontal wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico in which the Company participated during fiscal 2024 were completed in April 2024 with initial average production rates of 732 barrels of oil, 1,481 barrels of water and 657,000 cubic feet of gas per day, or 842 of oil equivalent per day. Mexco’s working interest in these wells is approximately 1.16%. A horizontal well in the Penn Shale formation of the Delaware Basin in Lea County, New Mexico was completed in May 2024 with the initial production rate of 964 barrels of oil, 2,441 barrels of water and 626,000 cubic feet of gas per day, or 1,068 of oil equivalent per day. Mexco’s working interest in this well is .165%. Subsequently, in July 2024, the Company expended approximately $21,000 for the completion costs of four horizontial wells in the Bone Spring Sand formation of the Delaware Basin in Lea County, New Mexico that the Company participated in drilling during fiscal 2024. Mexco’s working interest in these wells is .45%. In May 2024, Mexco expended approximately $27,000 for additional drilling costs in an exploratory well in the Fusselman Formation of Irion County, Texas. This well was later determined to be noncommercial and will be plugged and abandoned. Acquisitions. In April 2024, the Company acquired small royalty (mineral) interests in 21 wells operated by Anadarko Petroleum Corporation and Cimarex Energy Company and located in Reeves County, Texas for a purchase price of $158,000. 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 prices 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 $64.59 per bbl in December 2023 to a high of $89.66 per bbl in September 2023. The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $1.25 per MMBtu in March 2024 to a high of $3.34 per MMBtu in October 2023. On June 30, 2024, the WTI posted price for crude oil was $77.52 and the Henry Hub spot price for natural gas was $2.42 per MMBtu. See Results of Operations below for realized prices. Page 14 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 June 30, 2024: Payments due in: Total less than 1 year 1 - 3 years over 3 years Contractual obligations: Leases (1) $ 185,813 $ 60,146 $ 125,667 $ - (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, extended another 36 months to July 31, 2024 and extended another 36 to July 31, 2027. Of this total obligation for the remainder of the lease, our majority shareholder will pay $10,625 less than 1 year and $21,198 1-3 years for his portion of the shared office space. Results of Operations – Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023. For the quarter ended June 30, 2024, net income was $291,039 compared to net income of $465,614 for the quarter ended June 30, 2023. This was primarily the result of a decrease in operating revenues and an increase in operating expenses, which is further explained below. Oil and gas sales. Revenue from oil and gas sales was $1,688,056 for the quarter ended June 30, 2024, a 2% decrease from $1,715,090 for the quarter ended June 30, 2023. This primarily resulted from a decrease in oil and gas production and a decrease in gas prices partially offset by an increase in oil prices. The decrease in the natural gas price was, in part, due to temporary pipeline constraints on certain properties and at certain times, prices were negative. The following table sets forth our oil and natural gas revenues, production quantities and average prices received during the three months ended June 30: 2024 2023 % Difference Oil: Revenue $ 1,510,304 $ 1,429,678 5.6 % Volume (bbls) 18,909 19,528 (3.2 )% Average Price (per bbl) $ 79.87 $ 73.21 9.1 % Gas: Revenue $ 177,752 $ 285,412 (37.7 )% Volume (mcf) 136,307 141,578 (3.7 )% Average Price (per mcf) $ 1.30 $ 2.02 (35.6 )% Production and exploration. Production costs were $437,420 for the three months ended June 30, 2024, a 25% increase from $349,407 for the three months ended June 30, 2023. This increase is primarily the result of an increase in gathering, processing and transportation expenses as well as lease operating expenses on new wells in which we own a working interest. Depreciation, depletion and amortization. Depreciation, depletion and amortization (“DD&A”) expense was $539,697 for the first quarter of fiscal 2025, an 11% increase from $486,186 for the first quarter of fiscal 2024, primarily due to a decrease in gas reserves and an increase in the full cost pool amortization base partially offset by a decrease in oil and gas production volumes and an increase in oil. General and administrative expenses. General and administrative expenses were $367,045 for the three months ended June 30, 2024, an 8% increase from $340,969 for the three months ended June 30, 2023. This was primarily due to an increase in engineering and contract services. Interest expense. Interest expense, which consisted of debt issuance costs, was $1,083 for the first quarter of fiscal 2025, an increase of 0.2% from $1,081 for the first quarter of fiscal 2024. Income taxes. Federal income tax for the three months ended June 30, 2024 was $86,520. Federal income tax for the three months ended June 30, 2023 was $88,683. State income tax was $20,066 for the three months ended June 30, 2024, a 39% decrease from $32,818 for the three months ended June 30, 2023 due to the decrease in oil and natural gas sales in the State of New Mexico. The effective tax rate for state and federal taxes combined for the three months ended June 30, 2024 and 2023 was 27% and 21%, respectively. Page 15