|
Recommendation: Speculative
Buy
Basis for Recommendation:
We reiterate our speculative BUY rating for Mexco Energy.
Mexco's share price has softened recently to $3.85 per share or
15% from the adjusted $4.54 per share level in early February. We
believe the softer share price is traceable to:
- Overall weakness in junior oil and gas exploration company shares
as the commodity price of their output is about one-half to two-thirds
of levels a year ago;
- Anticipated lower third quarter results following a supply disruption
at one of Mexco's gas gatherers. The lost production did have
some affect on the quarter;
- Some sell pressure on the shares by a charitable foundation.
Mexco has a thin float so minor swings in the demand for the shares
can have a meaningful influence on the share price. This particular
institution has gradually lowered its stake from 64,000 shares
to about 50,000 currently.
As to the first point, we believe the weak pricing
environment for natural gas could be temporary. Clearly demand was
down sharply this winter as the economy cooled but the weather did
not. However, mild winter temperatures could soon give way to summer
heat, which usually boosts natural gas consumption. Prices, too,
could soon adjust to some factors that impact supply, namely transportation
and the rapid decline curves of newly discovered Gulf of Mexico
gas.
Mexco did experience a temporary loss of the ability to deliver
some gas at El Cinco field for several days in November. The Company's
gatherer in this field, Sid Richardson Energy Services, had a faulty
line that was repaired faster than we originally thought, but it
did have some affect on the quarter, as production would have been
somewhat higher.
As for the sell overhang of Mexco shares, the charitable institution
we referred to earlier has been a long time investor in Mexco. We
understand they will remain an investor but at a reduced level.
The shares could move once this sell pressure subsides.
We remain optimistic about Mexco's fundamental position and believe
the share price is undervalued by as much as 70 to 100%.
Recent Events
On February 27, the Company announced commencement of production
from a Canyon Sand gas well in Edwards County after completion of
a short six mile gas pipeline. Mexco has a 12.5% working interest
in the Bludworth #1, and the well is currently producing at rates
of 500 mcf per day and appears to be a solid producer. Mexco owns
a similar interest in 4460 acres adjacent to the well, and further
evaluation is being conducted.
In a move to help liquidity of the shares and to reflect solid performance
last year, Mexco announced a 10% stock dividend payable February
28.
Third Quarter Results & Outlook
For the quarter ended December 31, 2001, Mexco reported a loss of
$32,000 compared to net income of $409,000 a year ago. Oil and gas
revenue declined 59% from $798,000 to $330,000. The decrease resulted
from lower oil and gas prices. Mexco's average oil price declined
sharply to $18.15 per barrel from $31.45 and gas declined to $2.05
per mcf from $5.83 per mcf in last year's comparable quarter. Oil
production was up nicely, by 15% to 5034 barrels from 4,139 barrels
and gas production increased 3% to 116,319 mcf from 113,420 mcf.
Production costs fell 3%, interest expense decreased 33% to $16,000
from $24,000 due to lower interest rates. G&A rose significantly
from $74,000 last year to $120,000 due to higher financial consulting
and engineering services. DDA increased 80% to $106,000 from $59,000.
Operating cash flow was $0.8 million in the quarter down from $1.1
million in the respective 2001 fiscal quarter. Debt jumped to $0.8
million to $1.4 million as Mexco added to its property account by
drawing on existing bank lines. Cash flow from operations was $0.50
per share for the nine months.
On the whole, Mexco managed the lower pricing environment and slightly
lower production (relative to Company expectations) pretty well
in our view. We're leaving our yearly eps estimate unchanged at
$0.20 this year (3/31/02) on $1.74 million in revenue and eps of
$0.36 for fiscal 2003 on revenue of $2.38 million. For fiscal 2003
our model assumes an average gas price of $3.50 per mcf, which is
a bit aggressive, and $18.00 per barrel of oil, which is slightly
on the conservative side.
| MEXCO ENERGY CORPORATION |
| Condensed Income Statement |
| as of December 31, 2001 |
| (in $ thousands except per
share) |
|
|
|
|
FQ3 2001 |
FQ3 2000 |
| Operating revenues: |
|
|
| Oil & gas |
$330 |
$798 |
| Other |
1 |
2 |
| Total |
331 |
800 |
|
|
|
| Operating expenses: |
|
|
| Production |
131 |
135 |
| DD&A |
106 |
59 |
| G&A |
120 |
74 |
| Total |
357 |
268 |
|
|
|
| Operating income/(loss) |
(26) |
532 |
|
|
|
| Other income (expense) |
|
|
| Interest income |
1 |
0 |
| Interest expense |
(16) |
(24) |
| Net other |
(15) |
(24) |
|
|
|
| Earnings/(loss) before tax |
(41) |
508 |
| Income Tax Expense (Benefit) |
(9) |
99 |
| Net Income |
($32) |
$409 |
|
|
|
| Earning/(Loss) Per Share |
($0.02) |
$0.25 |
|
|
|
| Shares out (F.D.) |
1,603 |
1,634 |
| MEXCO ENERGY CORPORATION |
| Comparative Balance Sheets
(condensed) |
| (in $ thousands) |
|
|
|
|
31-Dec-01 |
31-Mar-01 |
| Current Assets: |
|
|
| Cash |
$73 |
$379 |
| Accounts receivable |
186 |
499 |
| Deposits & other |
76 |
74 |
|
$335 |
$952 |
|
|
|
| Oil & gas properties,
net |
5,280 |
3,986 |
| Other assets |
25 |
24 |
|
|
|
| TOTAL |
$6,029 |
$4,961 |
|
|
|
|
|
|
| Current Liabilities: |
|
|
| Accounts payable & accrued |
143 |
78 |
| Taxes payable |
-- |
52 |
|
143 |
129 |
|
|
|
| Long Term Debt |
1,400 |
600 |
| Deferred Taxes |
261 |
186 |
| Stockholders’ Equity |
4,225 |
4,047 |
|
5,886 |
4,833 |
|
|
|
| TOTAL |
$6,029 |
$4,961 |
|
|
|
| Current Ratio: |
2.34:1.00 |
7.38:1.00 |
| Debt/Total Capitalization: |
23.80% |
12.40% |
| MEXCO ENERGY CORPORATION |
| (Revenue & Earnings Estimates)2 |
| Year Ended March 31 |
|
|
|
|
|
2001A |
2002E |
2003P1 |
| Operating revenues: |
|
|
|
| Oil & gas |
$3,092,210 |
$1,735,000 |
$2,370,000 |
| Other |
7,756 |
9 |
8,000 |
| Total operating revenues |
3,099,966 |
1,743,800 |
2,378,000 |
|
|
|
|
| Operating expenses: |
|
|
|
| Production |
526,032 |
521,000 |
600,000 |
| Depreciation, depletion &
amortization |
377,761 |
400,000 |
460,000 |
| General & administrative |
314,397 |
320,000 |
372,290 |
|
|
|
|
| Total operating expenses |
1,218,190 |
1,241,000 |
1,432,290 |
|
|
|
|
| Operating income: |
1,881,776 |
502,800 |
945,710 |
|
|
|
|
| Other income (expense): |
|
|
|
| Interest income |
3,839 |
3,000 |
2,000 |
| Interest expense |
(95,999) |
(58,000) |
(76,500) |
|
|
|
|
| Net other expense |
(92,160) |
(55,000) |
(74,500) |
|
|
|
|
| Earnings (loss) before income
taxes |
1,789,616 |
447,800 |
871,210 |
|
|
|
|
| Income tax expense: |
250,158 |
134,340 |
296,210 |
|
|
|
|
| Net earnings (loss) |
$1,539,458 |
$313,460 |
$575,000 |
|
|
|
|
| Earnings (loss) per share: |
|
|
|
| Diluted |
$0.95 |
$0.20 |
$0.36 |
|
|
|
|
| Weighted average outstanding
shares: |
|
|
|
| Fully diluted |
1,625,003 |
1,600,000 |
1,600,000 |
|
|
|
|
|
|
|
|
| 1Assumes
average product price of $18.00bbl and $3.50 mcf in FY2003. |
| 2Dutton
& Associates estimates |
| A = Actual E = Estimated |
Analyst:
Les Childress
Les Childress has more than 21 years experience in providing investment
opinions on the value of publicly traded securities. His experience
includes though is not limited to analyzing energy companies, financials,
and special situations. He was an analyst for Schneider, Bernet &
Hickman in Dallas, Texas, and went on to cover oil & gas stocks
for Composite Mutual Funds and Murphy Favre Securities in Seattle.
He was a partner and director of equity research at Harper McClean
& Company, also in Seattle. He is a member of the Seattle Society
of Financial Analysts and the Association for Investment Management
and Research, and is frequently and widely quoted in major newspapers,
radio, television and business publications.
Contact:
Mexco Energy Corporation, 214 W. Texas Avenue, Suite 1101, Midland,
TX 79701. Mr. Nicholas Taylor, President. Tel: (915) 682-1119
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
Information, opinions or recommendations
contained in this research report are submitted solely for advisory
and information purposes. The information used and statements of
fact made have been obtained from sources considered reliable but
we neither guarantee nor represent the completeness or accuracy.
Such information and the opinions expressed are subject to change
without notice. This research note is not intended as an offering
or a solicitation of an offer to buy or sell the securities mentioned
or discussed. Neither the Firm, its principals, nor the assigned
analysts own or trade shares of any company covered. The Firm does
not accept any equity compensation. Anyone may enroll a company
for research coverage, which costs US $22,000 prepaid for one-year.
Reports are performed on behalf of the public, and are not a service
to any company. The analysts are responsible only to the public,
and are paid in advance to eliminate pecuniary interests and insure
independence. Please read full disclosure and other reports and
notes on the Company at www.JMDutton.com.
© Copyright, 2002, by J.M. Dutton & Associates,
LLC.
|