Item 2. Properties
ITEM 2. PROPERTIES
Our
properties consist primarily of oil and gas wells and ownership interests in leasehold acreage, both developed and undeveloped. As
of March 31, 2026, we had interests in approximately 8,100 gross (26.1 net) producing oil and gas wells and owned leasehold mineral,
royalty and other interests in approximately 705,000 gross (2,697 net) acres.
Oil
and Natural Gas Reserves
In
accordance with current SEC rules, the average prices used in computing reserves at March 31, 2026 were $62.76 per bbl of oil compared
to $73.79 in 2025, a decrease of 15%, and $2.24 per mcf of natural gas compared to $2.14 in 2025, an increase of 5%. These prices are
based on the 12-month unweighted arithmetic average of the first-day-of-the-month market prices for oil and natural gas sales during
fiscal 2026. The benchmark price of $59.79 per bbl of oil at March 31, 2026 versus $71.00 at March 31, 2025, was adjusted by lease for
gravity, transportation fees and market differentials and did not give effect to derivative transactions. The benchmark price of $3.72
per mcf of natural gas at March 31, 2026 versus $2.44 at March 31, 2025, 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, the present value of future net revenues discounted at 10%, and related changes, see
the Notes to the Company’s consolidated financial statements.
Proved
oil and natural gas reserves are those quantities of oil and gas that, by analysis of geoscience and engineering data, can be estimated
with reasonable certainty to be economically producible under existing economic and operating conditions. Proved developed reserves are
those expected to be recovered from existing wells, equipment, and operating methods. Proved undeveloped reserves are those expected
to be recovered from new wells on undrilled acreage or from existing wells requiring significant additional investment to establish production.
Mexco’s
proved reserves as of March 31, 2026 and 2025 were prepared by Russell K. Hall and Associates, Inc., Environmental Engineering Consultants
(“Hall and Associates”), an independent petroleum engineering firm located in Midland, Texas. A summary of their report is
filed as Exhibit 99.1 to this Annual Report.
Management
is responsible for providing accurate technical and operating data to Hall and Associates and for maintaining internal controls over
the reserve estimation process to provide reasonable assurance that proved reserve estimates are calculated in accordance with SEC rules.
Our Chief Financial Officer reviews the final reserves estimate and consults with Alan Neal, the representative at Hall and Associates
responsible for evaluating the proved reserves covered by this report. Our Chairman and Chief Executive Officer also reviews the final
reserves report.
Estimates
of proved reserves are inherently imprecise and subject to change as additional data becomes available. These estimates are based on
engineering and geological interpretation and require assumptions regarding production rates, future development costs, operating expenses,
and commodity prices. Actual results will vary from these estimates, and such variances could be material and may adversely affect future
cash flows, results of operations, and capital resources.
In
accordance with SEC rules, reserve estimates and related present value calculations use the 12-month unweighted arithmetic average of
the first-day-of-the-month prices for oil and natural gas. Prices are held constant over the economic life of the properties. Actual
future prices and costs may differ materially from those used in these estimates. Unless replaced through acquisitions, successful exploration,
or development activities, proved reserves will decline as production occurs.
16
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,
2026
2025
Oil (Bbls):
Proved developed – Producing
387,670
390,940
Proved developed – Non-producing
75,105
14,900
Proved undeveloped
195,840
269,000
Total
658,615
674,840
Natural gas (Mcf):
Proved developed – Producing
3,902,120
3,554,920
Proved developed – Non-producing
302,490
99,970
Proved undeveloped
466,060
704,810
Total
4,670,670
4,359,700
Total
net proved reserves (BOE) (1)
1,437,060
1,401,460
PV-10 Value (2)
$ 21,131,000
$ 23,216,000
Present value of future
income tax discounted at 10%
(2,466,000 )
(3,141,000 )
Standardized
measure of discounted future net cash flows (3)
$ 18,665,000
$ 20,075,000
Prices used in calculating reserves: (4)
Natural gas (per Mcf)
$ 2.24
$ 2.14
Oil (per Bbl)
$ 62.76
$ 73.79
(1) These
reserve estimates do not include the Company’s interest in two LLCs referred to in
Item 1. Business – Company Profile.
(2) PV-10
represents the present value of estimated future net cash flows attributable to our proved
oil and natural gas reserves, before income taxes, discounted at 10% per annum. PV-10 is
a non-GAAP financial measure. It is relevant to investors because it provides a standardized
basis for comparing the relative size and value of proved reserves across companies and excludes
the impact of future income taxes. We use PV-10 internally to evaluate the economic attractiveness
of our oil and natural gas properties. The standardized measure of discounted future net
cash flows is derived from PV-10 after deducting estimated future income taxes.
(3) In
accordance with SEC requirements, the standardized measure of discounted future net cash
flows is calculated using 12-month average first-day-of-the-month prices for oil and natural
gas. Future cash flows are estimated based on expected production from proved reserves, reduced
by estimated future development and production costs (based on year-end costs) and estimated
future income taxes (based on year-end statutory tax rates, including consideration of enacted
future rate changes and available tax attributes). All calculations assume continuation of
existing economic conditions and constant prices and costs over the life of the reserves.
(4) These
prices reflect adjustments by lease for quality, transportation fees, and market differentials.
During fiscal 2026, we added proved reserves of 247 thousand BOE (“MBOE”) through extensions and discoveries, added 39 MBOE
through acquisitions, and added 53 MBOE for upward revisions of previous estimates. Such upward revisions are primarily attributable to
improved well performance, revisions to estimated future recoveries based on additional production history, and changes in the timing
of future development activities. The reduction in proved undeveloped reserves was primarily attributable to properties in Lea County,
New Mexico, due to changes in the timing of future development in wells in which we own a working interest. These interests are held by
production and remain in place for future development.
During
the fiscal year ending March 31, 2026, we had a working or royalty interest in the development of 25 wells, converting reserves of approximately
48,000 BOE from proved undeveloped to proved developed – producing with a capital cost of approximately $119,000.
Oil
and natural gas prices significantly impact the calculation of PV-10 and the standardized measure of discounted future net cash flows.
These measures do not represent an estimate of the fair value of the Company’s proved reserves. Any estimate of fair value would
also consider, among other factors, expected changes in future prices and costs, recovery of reserves beyond proved reserves, and a discount
rate more reflective of the time value of money and associated risks.
Future
prices and costs may differ materially from those used in these estimates. The 10% discount rate required by Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 932, Extractive Activities—Oil and Gas ,
may not be the most appropriate rate for all purposes. In addition, the present value calculations are highly sensitive to assumptions
regarding the timing of future production, which may prove 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
authorities or agencies during the year ended March 31, 2026, and no major discovery is believed to have caused a significant change
in our estimates of proved reserves since that date.
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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,
2026
2025
Gross
Net
Gross
Net
Exploratory Wells
Beginning wells in progress
-
-
-
-
Wells spud
1
.02
1
.10
Successful
wells
0
-
0
-
Ending
wells in progress
-
-
-
-
Development Wells
Beginning wells in progress
17
.03
16
.17
Wells spud
58
.19
38
.09
Successful
wells
(55 )
(.08 )
(37 )
(.23 )
Ending
wells in progress
20
.14
17
.03
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 177 gross wells (.07 net wells) on Company-owned minerals
and royalties at no expense to the Company. We expect production from our mineral interests to 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 laterals that 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, 2026, we held an interest in approximately 8,100 gross (26.1
net) productive wells, including approximately 7,000 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, 2026:
Acreage
Gross
Net
Texas
387,100
1,497
North Dakota
68,600
27
Oklahoma
66,900
800
Louisiana
55,600
101
Ohio
35,800
4
Wyoming
30,700
15
New Mexico
30,700
182
Colorado
10,300
21
Kansas
8,500
41
Montana
7,200
1
Arkansas
1,600
5
Alabama
1,000
2
South Dakota
600
-
Virginia
100
1
Total
704,700
2,697
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,
2026
2025
Oil (a):
Production
(Bbls)
82,133
83,564
Revenue
$ 5,276,981
$ 6,145,674
Average Bbls per day
(d)
225
229
Average sales price
per Bbl
$ 64.25
$ 73.54
Gas (b):
Production (Mcf)
681,794
570,012
Revenue
$ 1,271,067
$ 970,811
Average Mcf per day
(d)
1,868
1,562
Average sales price
per Mcf
$ 1.86
$ 1.70
Total BOE (c)
195,765
178,566
Production costs:
Production expenses:
$ 936,975
$ 1,043,202
Production expenses
per BOE
$ 4.09
$ 5.84
Production expenses
per sales dollar
$ 0.14
$ 0.15
Production and ad valorem
taxes:
$ 491,378
$ 561,894
Production and ad valorem
taxes per BOE
$ 2.14
$ 3.15
Production and ad valorem
taxes per sales dollar
$ 0.08
$ 0.08
Total oil and gas revenue
$ 6,548,048
$ 7,116,485
(a)
Includes condensate.
(b)
Includes natural gas liquids.
(c)
Natural gas production is
converted to oil production at a ratio of six Mcf to one Bbl of oil.
(d)
Calculated on a 365-day year.