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 this 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 in non-operated properties in areas with significant development potential. At September 30, 2024, we had working capital of $1,974,033 compared to working capital of $3,259,200 at March 31, 2024, a decrease of $1,285,167 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 Six Months Ended September 30, 2024 2023 Change Net cash provided by operating activities $ 2,006,405 $ 2,430,364 $ (423,959 ) Net cash used in investing activities $ (2,066,957 ) $ (1,544,299 ) $ 522,658 Net cash used in financing activities $ (834,575 ) $ (536,644 ) $ 297,931 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 six months ended September 30, 2024 was $2,006,405 in comparison to $2,430,364 for the six months ended September 30, 2023. This decrease of $423,959 in our cash flow operating activities consisted of an increase in our non-cash expenses of $216,282; a decrease in our accounts receivable of $483,411; a decrease of $20,176 in our accounts payable and accrued expenses; and, a decrease in our net income of $126,810. 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 six months ended September 30, 2024, we had net cash of $2,066,957 used for additions to oil and gas properties compared to $1,544,299 for the six months ended September 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 $834,575 for the six months ended September 30, 2024 compared to cash flow provided by our financing activities of $536,644 for the six months ended September 30, 2023. During the six months ended September 30, 2024, we expended $209,000 to pay the special dividend and $703,216 to purchase 57,766 shares of our stock for the treasury account and received $77,641 from the exercise of stock options. Accordingly, net cash decreased $895,127, leaving cash and cash equivalents on hand of $1,578,357 as of September 30, 2024. Page 13 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 $2,000,000 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. Subsequently, in October 2024, the Company expended approximately $127,000 to complete these wells. During the first six months of fiscal 2025, Mexco expended approximately $293,000 to drill and complete 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 $1,200,000 has been funded as of September 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. To date, this LLC has returned $137,076 or 11% of the total investment. Completion of Wells Drilled in Fiscal 2024. The Company expended approximately $300,000 for the completion of 19 horizontal wells in which the Company participated during fiscal 2024. The Company expended approximately $107,000 for the completion costs of two horizontal 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%. 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%. The Company expended approximately $207,000 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%. Subsequently, in October 2024, these wells were completed with initial average production rates of 893 barrels of oil, 2,990 barrels of water and 1,161,000 cubic feet of gas per day, or 1,087 BOE per day. Acquisitions. In April 2024, the Company acquired royalty interests in 21 producing wells operated by Anadarko Petroleum Corporation and Cimarex Energy Company and located in Reeves County, Texas for a purchase price of $158,000. In August 2024, the Company acquired royalty interests in 6 producing wells operated by Marathon Oil and located in Karnes County, Texas for a purchase price of $50,000; royalty interests in 15 producing wells operated by Anadarko Petroleum Corporation and located in Weld County, Colorado for a purchase price of $118,000; and, royalty interests in approximately 250 producing wells operated by Samson Exploration, EOG Resources and others in Laramie County, Wyoming and Adams and Weld Counties, Colorado for a purchase price of $483,000. All of these acquisitions were effective September 1, 2024. In September 2024, the Company acquired royalty interests in 20 producing wells operated by Marathon Oil and Murphy Exploration and located in Karnes County, Texas for a purchase price of $90,000 and effective August 1, 2024. 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. Page 14 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 $61.73 per bbl in September 2024 to a high of $86.77 per bbl in October 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 September 30, 2024, the WTI posted price for crude oil was $64.15 and the Henry Hub spot price for natural gas was $2.65 per MMBtu. See Results of Operations below for realized prices. Pipeline capacity constraints and maintenance in the Permian Basin area has contributed to a wider difference between the WaHa Hub and the Henry Hub and at times prices were negative. 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 September 30, 2024: Payments due in: Total less than 1 year 1 - 3 years over 3 years Contractual obligations: Leases (1) $ 170,907 $ 60,320 $ 110,587 $ - (1) The lease amount represents the monthly rent amount for our principal office space in Midland, Texas under a 36-month lease agreement expiring July 31, 2027. Of this total obligation for the remainder of the lease, our majority shareholder will pay $10,175 less than 1 year and $18,354 1-3 years for his portion of the shared office space. Results of Operations – Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023. There was net income of $317,198 for the quarter ended September 30, 2024 compared to net income of $269,433 for the quarter ended September 30, 2023. This was a result of an increase in oil and gas revenues partially offset by an increase in operating expense that is further explained below. Oil and gas sales. Revenue from oil and gas sales was $1,695,853 for the second quarter of fiscal 2025, a 23% increase from $1,380,710 for the same period of fiscal 2024. This resulted from an increase in oil and gas production offset by a decrease in oil and gas 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 September 30: 2024 2023 % Difference Oil: Revenue $ 1,521,618 $ 1,099,806 38.4 % Volume (bbls) 20,325 13,661 48.8 % Average Price (per bbl) $ 74.86 $ 80.51 (7.0 %) Gas: Revenue $ 174,235 $ 280,904 (38.0 %) Volume (mcf) 133,984 108,087 24.0 % Average Price (per mcf) $ 1.30 $ 2.60 (50.0 %) Production and exploration. Production costs were $413,405 for the second quarter of fiscal 2025, a 5% increase from $392,674 for the same period of fiscal 2024. This is the result of an increase in production taxes and marketing charges as a result of the increase in oil revenues and an increase in lease operating expense on new wells in which we own a working interest. Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $584,288 for the second quarter of fiscal 2025, a 53% increase from $382,180 for the same period of fiscal 2024, primarily due to a an increase in the full cost pool amortization base, an increase in oil and gas production and a decrease in gas reserves partially offset by an increase in oil reserves. Page 15 General and administrative expenses. General and administrative expenses were $334,525 for the second quarter of fiscal 2025, a 9% increase from $305,543 for the same period of fiscal 2024. This was primarily due to an increase in accounting fees and contract services. Income taxes. Federal income tax for the three months ended September 30, 2024 was $84,833. Federal income tax for the three months ended September 30, 2023 was $61,179. State income tax was $26,920 for the three months ended September 30, 2024, a 102% increase from $13,346 for the three months ended September 30, 2023 due to the increase in oil and natural gas sales in the State of New Mexico and the acquired properties in the State of Colorado. The effective tax rate for the three months ended September 30, 2024 and 2023 was 26% and 22%, respectively. Results of Operations – Six Months Ended September 30, 2024 Compared to Six Months Ended September 30, 2023. For the six months ended September 30, 2024, there was net income of $608,237 compared to net income of $735,047 for the six months ended September 30, 2023. This was a result of an increase in operating revenues partially offset by an increase in operating expenses that is further explained below. Oil and gas sales. Revenue from oil and gas sales was $3,383,909 for the six months ended September 30, 2024, a 9% increase from $3,095,800 for the same period of fiscal 2024. This resulted from an increase in oil and gas production and an increase in oil prices partially offset by a decrease gas 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 six months ended September 30: 2024 2023 % Difference Oil: Revenue $ 3,031,922 $ 2,529,484 19.9 % Volume (bbls) 39,234 33,189 18.2 % Average Price (per bbl) $ 77.28 $ 76.21 1.4 % Gas: Revenue $ 351,987 $ 566,316 (37.8 %) Volume (mcf) 270,291 249,665 8.3 % Average Price (per mcf) $ 1.30 $ 2.27 (42.7 %) Production and exploration. Production costs were $850,825 for the six months ended September 30, 2024, a 15% increase from $742,081 for the six months ended September 30, 2023. This is the result of an increase in production taxes and marketing charges as a result of the increase in oil and gas revenues and an increase in lease operating expense on new wells in which we own an interest. Depreciation, depletion and amortization. Depreciation, depletion and amortization expense was $1,123,985 for the six months ended September 30, 2024, a 29% increase from $868,366 for the six months ended September 30, 2023, primarily due to an increase in the full cost pool amortization base, an increase in oil and gas production, decrease in gas reserves partially offset by an increase in oil reserves. General and administrative expenses. General and administrative expenses were $701,570 for the six months ended September 30, 2024, a 9% increase from $646,512 for the six months ended September 30, 2023. This was primarily due to an increase in accounting fess and contract and engineering services. Income taxes. Federal income tax for the six months ended September 30, 2024 was $171,353. Federal income tax for the six months ended September 30, 2023 was $149,862. State income tax was $46,986 for the six months ended September 30, 2024, a 2% increase from $46,164 for the six months ended September 30, 2023 due to the increase in oil and natural gas sales in the states that have state income tax. The effective tax rate for the six months ended September 30, 2024 and 2023 was 26% and 21%, respectively. Page 16