MEXC Research Note

MEXCO Energy (MEXC)
By: Les Childress

GAS RESERVES INCREASE 60.5% FOR FISCAL YEAR

On Thursday, May 23, Mexco filed an S.E.C. Form 8-K regarding its oil and gas reserve estimates for fiscal year end March 31, 2002. Based on evaluations from Mexco's external petroleum engineering firm (Joe C. Neal & Associates), total natural gas reserves vaulted 60.5% to 10.18 billion cubic feet from 6.35 billion cubic feet a year ago. Oil reserves increased a modest 1.1% to 237,306 barrels from 234,654 barrels last year.

While investors should be aware that estimating oil/gas reserves is an inherently imprecise process and quantities estimated can vary with prices and production risks, Mexco's actual results were clearly an upside surprise. We anticipated an excellent increase in gas reserves on the order of 40% or so and a slight decline in oil reserves, so the actual numbers exceeded our forecast by a healthy margin. As we indicated in our initial Mexco report and April 19, 2002 update, our assumptions on product pricing have been conservative. We assumed slightly above $18 per barrel for oil whereas industry numbers have remained higher, and Mexco's average actual price was $23. As for natural gas, we also assumed a fairly conservative $2.75 per mcf for the fiscal and calendar year 2002 and $3.50 per mcf for 2003. Mexco's actual average price through March was better than our forecast by $0.25 to $3.00 per mcf.

The upward surprise in reserve increase isn't entirely price related. In fact the biggest change in reserves is reflected in the proved undeveloped category for both oil and gas. Proved undeveloped oil reserves were 92,900 barrels up from zero a year ago, and proved undeveloped gas reserves were 5.02 billion cubic feet from just 8,234 mcf for the same time frame. This change is significant and is consistent with Mexco's operating philosophy as an oil and gas investment company versus an E&P operating company. Mexco is almost never an operator of its prospects. Instead the Company emphasizes reserve increases through seismic evaluation and reentry of existing wells. Thus, the proven undeveloped reserves should show increases if reentries are successful. The success of their reentry efforts is 'bearing fruit.'

Though Mexco shares are up to the $4.50 level from $3.80 in mid-April primarily on the announced reserve increase, we believe there remains excellent upside potential from here. We continue our current outstanding BUY recommendation on this promising micro cap company.

J.M.Dutton & Associates, LLC. John M. Dutton, President and Supervisory Analyst, 1129 Manning Drive, Suite 310, El Dorado Hills, CA 95762 Phone (916) 941-4985, Fax (978) 418-6422 Email: [email protected] Web site: www.JMDutton.com

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