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As used in this document, “the Company”, “Mexco”, “we”, “us” and “our” refer to Mexco Energy Corporation and its consolidated subsidiaries.
Abbreviations or definitions of certain terms commonly used in the oil and gas industry and in this Form 10-K can be found in the “Glossary of Abbreviations and Terms”.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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”). These forward-looking statements are generally located in the material set forth under the headings “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business”, “Properties” but may be found in other locations as well, and are typically identified by the words “could”, “should”, “expect”, “project”, “estimate”, “believe”, “anticipate”, “intend”, “budget”, “plan”, “forecast”, “predict” and other similar expressions.
Forward-looking statements generally relate to our 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 and are based upon our management’s reasonable estimates of future results or trends. Actual results in future periods may differ materially from those expressed or implied by such forward-looking statements because of a number of risks and uncertainties affecting our business, including those discussed in “Risk Factors”. The factors that may affect our expectations regarding our operations include, among others, the following: our success in development, exploitation and exploration activities; our ability to make planned capital expenditures; declines in our production or prices of oil and gas; our ability to raise equity capital or incur additional indebtedness; our restrictive debt covenants; our acquisition and divestiture activities; weather conditions and events; the proximity, capacity, cost and availability of pipelines and other transportation facilities; increases in the cost of drilling, completion and gas gathering or other costs of production and operations; and other factors discussed elsewhere in this document.
We disclaim any intention or obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise.
ITEM 1. BUSINESS
General
Mexco Energy Corporation, a Colorado corporation, is an independent oil and gas company engaged in the acquisition, exploration, development and production of oil and gas properties located in the United States. Incorporated in April 1972 under the name Miller Oil Company, the Company changed its name to Mexco Energy Corporation effective April 30, 1980. At that time, the shareholders of the Company also approved amendments to the Articles of Incorporation resulting in a one-for-fifty reverse stock split of the Company's common stock.
In September 2010, Mexco acquired all of the issued and outstanding stock of Southwest Texas Disposal Corporation, a Texas corporation which owns royalties producing primarily natural gas.
On February 25, 1997, Mexco acquired all of the issued and outstanding stock of Forman Energy Corporation, a New York corporation also engaged in oil and gas exploration and development.
Our total estimated proved reserves at March 31, 2012 were approximately 8.445 billion cubic feet (“Bcf”) of natural gas and 346,000 barrels (“bbls”) of oil and natural gas liquids, and our estimated present value of proved reserves was approximately $25.0 million based on estimated future net revenues excluding taxes discounted at 10% per annum, pricing and other assumptions set forth in “Item 2 – Properties” below. During fiscal 2012, we added proved reserves of 409,000 thousand cubic feet equivalent (“Mcfe”) through extensions and discoveries, added 115,000 Mcfe through acquisitions and had upward revisions of previous estimates of 14,000 Mcfe.
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Nicholas C. Taylor beneficially owns approximately 44% of the outstanding shares of our common stock. Mr. Taylor is also our Chairman of the Board and Chief Executive Officer. As a result, Mr. Taylor has significant influence in matters voted on by our shareholders, including the election of our Board members. Mr. Taylor participates in all facets of our business and has a significant impact on both our business strategy and daily operations.
Company Profile
Since our inception, we have been engaged in acquiring and developing oil and gas properties and the exploration for and production of natural gas, crude oil, condensate and natural gas liquids (“NGLs”) within the United States. We have focused primarily on acquiring natural gas reserves until 2011 when we changed our focus to oil. We especially seek to acquire proved reserves that fit well with existing operations or in areas where the Company has established production. Acquisitions preferably will contain most of their value in producing wells, behind pipe reserves and high quality proved undeveloped locations. Competition for the purchase of proved reserves is intense. Sellers often utilize a bid process to sell properties. This process usually intensifies the competition and makes it extremely difficult to acquire reserves without assuming significant price and production risks. We actively search for opportunities to acquire proved oil and gas properties. However, because the competition is intense, we cannot give any assurance that we will be successful in our efforts during fiscal 2013.
While we own oil and gas properties in other states, the majority of our activities are centered in West Texas. We acquire interests in producing and non-producing oil and gas leases from landowners and leaseholders in areas considered favorable for oil and gas exploration, development and production. In addition, we may acquire oil and gas interests by joining in oil and gas drilling prospects generated by third parties. We may also employ a combination of the above methods of obtaining producing acreage and prospects. In recent years, we have placed primary emphasis on the evaluation and purchase of producing oil and gas properties, both working and royalty interests, and prospects that could have a potentially meaningful impact on our reserves.
Oil and Gas Operations
As of March 31, 2012, natural gas constituted approximately 80% of our total proved reserves and approximately 44% of our revenues for fiscal 2012. Revenues from oil and gas royalty interests accounted for approximately 36% of our revenues for fiscal 2012.
Newark East (Barnett Shale) Gas Field properties, encompassing 5,414 gross acres, 58 net acres, 144 gross producing wells and .97 net wells in Denton, Johnson, Tarrant and Wise Counties, Texas, account for approximately 6% of our discounted future net cash flows from proved reserves as of March 31, 2012. For fiscal 2012, this field, consisting of royalty interests, accounted for 10% of our gross revenues, 12% of our net revenues.
El Cinco Gas Field properties, encompassing 1,166 gross acres, 886 net acres, 7 gross producing wells and 5.35 net wells in Pecos County, Texas, account for approximately 41% of our discounted future net cash flows from proved reserves as of March 31, 2012. This is a multi-pay area where most of the leases have potential reserves in two zones. Of these discounted future net cash flows from proved reserves, approximately 19% are attributable to proven undeveloped reserves which will be developed through re-entry of existing wells and new drilling. One new well of these proven undeveloped reserves was drilled in this field in March 2012 and is currently undergoing completion procedures. For fiscal 2012, these properties accounted for 16% of our gross and 15% of our net revenues.
Gomez Gas Field properties, encompassing 13,058 gross acres, 72 net acres, 26 gross wells and .13 net wells in Pecos County, Texas, account for approximately 3% of our discounted future net cash flows from proved reserves as of March 31, 2012. For fiscal 2012, these properties accounted for 4% of our gross and net revenues. All of these properties, except for one, are royalty interests.
The Haynesville area natural gas properties, purchased in August 2010, encompass 5,135 gross acres, 13 net acres, 8 gross producing wells and .02 net wells in DeSoto Parish, Louisiana and accounted for approximately 3% of our discounted future net cash flows from proved reserves as of March 31, 2012. Of these discounted future net cash flows from proved reserves, approximately 2% are attributable to proven undeveloped reserves. For fiscal 2012, these properties, consisting of royalty interests, accounted for 3% of our gross revenues, 4% of our net revenues. This acreage contains an additional 56 potential drill sites.
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The Fuhrman-Mascho field oil properties, purchased in March 2011, encompass 160 gross acres, 19 net acres, 7 gross producing wells and .82 net wells in Andrews County, Texas and accounted for approximately 5% of our discounted future net cash flows from proved reserves as of March 31, 2012. Of these discounted future net cash flows from proved reserves, approximately .3% are attributable to proven undeveloped reserves. For fiscal 2012, these properties accounted for 6% of our gross and net revenues. This acreage contains an additional 9 potential drill sites.
We own approximately 1,477 gross and 737 net acres of material undeveloped acreage located above and below the Pembrook Unit of Upton County, Texas which is operated by Pioneer Natural Resources USA, Inc. and held by production from approximately 200 wells. This acreage has the potential for development in the horizontal Wolfcamp formation centered in the southern Midland Basin.
We own interests in and operate 17 producing wells, 1 recently drilled well currently being completed, 1 water injection well and 1 salt water disposal well. We own partial interests in an additional 2,943 producing wells located in the states of Texas, New Mexico, Oklahoma, Louisiana, Alabama, Mississippi, Arkansas, Wyoming, Kansas, Colorado, Montana and North Dakota. Additional information concerning these properties and our oil and gas reserves is provided below.
The following table indicates our oil and gas production in each of the last five years, all of which is located within the United States:
Year
Oil(Bbls)
Gas (Mcf)
2012
19,442
395,649
2011
17,040
459,446
2010
18,036
545,991
2009
17,065
542,099
2008
17,504
379,048
2007
16,738
339,174
Competition and Markets
The oil and gas industry is a highly competitive business. Competition for oil and gas reserve acquisitions is significant. We may compete with major oil and gas companies, other independent oil and gas companies and individual producers and operators, some of which have financial and personnel resources substantially in excess of those available to us. As a result, we may be placed at a competitive disadvantage. Competitive factors include price, contract terms and types and quality of service, including pipeline distribution. The price for oil and gas is widely followed and is generally subject to worldwide market factors. Our ability to acquire and develop additional properties in the future will depend upon our ability to conduct operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment in a timely manner.
In addition, the oil and gas industry as a whole also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers. The price and availability of alternative energy sources could adversely affect our revenue.