10-Q: Mexco Energy Q3 Net Income Plunges Amid Lower Oil Prices

Mexco Energy Corporation reported a significant decline in net income for the third quarter and first nine months of fiscal 2026, primarily driven by lower oil and natural gas prices and decreased oil production.

Summary

• Net income for the three months ended December 31, 2025, was $50,245, a substantial decrease from $469,133 in the prior year period.
• Net income for the nine months ended December 31, 2025, was $615,702, down from $1,077,370 in the same period of the previous year.
• Total operating revenues for the three months decreased by 27% to $1,383,887, and for the nine months decreased by 8% to $4,932,806.
• Oil sales revenue for the three months fell by 29.7% due to a 16.5% decrease in volume and a 15.9% decrease in average price per barrel ($58.59 vs. $69.65).
• Natural gas sales revenue for the three months decreased by 23.3%, despite a 7.3% increase in volume, due to a 28.8% drop in average price per Mcf ($1.26 vs. $1.77).
• For the nine months, oil sales revenue decreased by 17.4% (1.3% lower volume, 16.3% lower average price), while natural gas sales revenue increased by 43.4% (19.4% higher volume, 19.9% higher average price).
• Cash and cash equivalents increased to $2,267,640 at December 31, 2025, from $1,753,955 at March 31, 2025.
• Working capital increased by $716,567 to $3,186,231 at December 31, 2025.
• The company plans to participate in 50 horizontal and 1 vertical well in the fiscal year ending March 31, 2026, with an estimated cost of $1,700,000.
• Acquired royalty interests in 92 producing wells for approximately $626,000 during the nine months ended December 31, 2025.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this as a challenging quarter for Mexco Energy, with substantial declines in net income and revenue primarily due to unfavorable commodity prices, overshadowing improvements in cash flow and working capital.

Positives

• Cash and cash equivalents increased significantly to $2,267,640 at December 31, 2025, from $910,005 at December 31, 2024.
• Working capital improved by $716,567, reaching $3,186,231 at December 31, 2025.
• Net cash used in investing activities decreased to $2,212,547 for the nine months ended December 31, 2025, from $3,670,019 in the prior year, indicating more efficient capital deployment or fewer large investments.
• Net cash used in financing activities decreased significantly to $204,600 for the nine months ended December 31, 2025, from $834,575 in the prior year, primarily due to no stock repurchases.
• Natural gas production volumes increased by 7.3% for the three months and 19.4% for the nine months ended December 31, 2025.
• Other operating revenues increased by 30.6% for the three months and 61% for the nine months, driven by income from a limited liability company investment.
• Interest income increased to $23,953 for the three months and $58,610 for the nine months ended December 31, 2025, due to increased investment fund balances.
• The company has $1,500,000 available for borrowing on its credit facility with no outstanding balance as of December 31, 2025.
• An investment in a limited liability company (Utica and Marcellus areas) has returned $476,635, or 21% of the total investment.

Negatives

• Net income for the three months ended December 31, 2025, plummeted by 89.3% to $50,245 from $469,133 in the prior year.
• Net income for the nine months ended December 31, 2025, decreased by 42.8% to $615,702 from $1,077,370 in the prior year.
• Basic earnings per share decreased significantly to $0.02 for the three months and $0.30 for the nine months ended December 31, 2025, from $0.23 and $0.52, respectively, in the prior year.
• Total operating revenues decreased by 27% for the three months and 8% for the nine months ended December 31, 2025.
• Oil sales revenue decreased by 29.7% for the three months and 17.4% for the nine months, primarily due to lower average oil prices ($58.59/bbl vs. $69.65/bbl for Q3; $62.37/bbl vs. $74.50/bbl for 9M).
• Natural gas average prices decreased by 28.8% for the three months ($1.26/mcf vs. $1.77/mcf).
• Operating income decreased by 79.5% for the three months and 36.2% for the nine months ended December 31, 2025.
• Income tax expense for the three months ended December 31, 2025, was $64,106, compared to an income tax benefit of $18,305 in the prior year, representing a significant swing to expense.
• An exploratory vertical well in Ward County, Texas, was determined to be noncommercial in November 2025, after an expenditure of approximately $65,000.

Risks

• Fluctuations in commodity prices (crude oil and natural gas) are the most significant market risk, directly impacting financial condition, results of operations, and capital resources.
• Volatility in energy markets makes predicting future oil and natural gas price movements extremely difficult.
• Pipeline capacity constraints and maintenance in the Permian Basin area have adversely impacted realized natural gas prices, contributing to variability in operating results.
• Declines in oil and natural gas prices can materially adversely affect financial condition, liquidity, ability to obtain financing, and operating results.
• Price reductions can reduce the borrowing base under the credit facility and adversely affect cash flow for capital expenditures and ability to obtain additional capital.
• A noncash write-down of oil and gas properties could be required under full cost accounting rules if prices decline significantly, even for a short period.
• Lower prices may reduce the amount of crude oil and natural gas that can be produced economically, potentially leading to reductions in proved reserves.
• The company is subject to credit risk related to nonperformance by purchasers of oil and gas production, as receivables are generally not collateralized.
• The company may be a party to various legal proceedings and claims incidental to its business, though currently not expected to have a material adverse effect.
• The company's estimates and assumptions, particularly for oil and natural gas reserves, are subject to actual results differing materially.

Future Outlook

The company plans to participate in the drilling and completion of fifty horizontal wells and one vertical well at an estimated cost of approximately $1,700,000 for the fiscal year ending March 31, 2026. Its long-term strategy focuses on increasing profit margins by acquiring and developing oil and gas properties with potential for long-lived production, specifically targeting royalties and working interests in non-operated properties in areas with significant development potential. The company is currently evaluating the full impact of the recently enacted One Big Beautiful Bill (OBBB) on its financial statements, which includes significant changes to federal tax policy, environmental funding, and energy development regulations. Additionally, the company initiated the process of establishing a defined contribution retirement plan for eligible employees in January 2026, which is not expected to have a material impact on financial statements.

Management Comments

• "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."
• "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 royalties and working interests in non-operated properties in areas with significant development potential."
• "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."
• "We can provide no assurance that dividends will be declared in the future or as to the amount of any future dividend."

Industry Context

StockSavvy.ai notes that the significant decline in Mexco Energy's net income and oil revenues reflects the broader volatility in crude oil prices observed during the period, with NYMEX WTI ranging from $51.25 to $76.02 per barrel. The company's natural gas segment, while showing increased production volumes, was also impacted by lower average prices, exacerbated by pipeline capacity constraints in the Permian Basin, a common challenge for regional producers. The enactment of the "One Big Beautiful Bill" (OBBB) introduces regulatory and tax uncertainties that could affect the entire domestic energy sector, requiring careful evaluation by all industry participants.

Comparison to Industry Standards

• The company's average realized oil price of $58.59/bbl for Q3 2026 and $62.37/bbl for 9M 2026 is significantly below the high of $76.02/bbl seen in January 2025 for NYMEX WTI, indicating either regional price differentials, lack of hedging strategies, or lower quality crude compared to benchmark prices.
• The average realized natural gas price of $1.26/mcf for Q3 2026 and $1.76/mcf for 9M 2026 is substantially lower than the Henry Hub high of $9.86/MMBtu in January 2025, and even below the low of $2.65/MMBtu in June and October 2025. This suggests severe localized pricing issues, likely due to the Permian Basin pipeline constraints mentioned, which can lead to WaHa Hub prices being significantly discounted or even negative compared to Henry Hub, a performance notably weaker than companies with better access to diversified takeaway capacity or those operating in less constrained basins.
• The 21% return on the limited liability company investment in the Utica and Marcellus areas is a positive indicator for that specific venture, potentially outperforming some direct E&P projects in the current volatile price environment.

Legal Proceedings

• The company may, from time to time, be a party to various proceedings and claims incidental to its business, but believes the liability, if any, will not have a material adverse effect on its consolidated financial position, liquidity, capital resources, or future results of operations.

Related Party Transactions

• Shared office expenditures and administrative/operating expenses paid on behalf of the principal stockholder, totaling $14,366 for Q3 2025 and $37,241 for 9M 2025.
• The principal stockholder pays his share of the lease amount for shared office space directly to the lessor, amounting to $2,544 for Q3 2025 and $7,631 for 9M 2025.

Stakeholder Impact

• Shareholders: Negative impact due to significant decline in net income and EPS. Future dividends are not assured, despite a dividend declaration.
• Employees: Potential positive impact from the initiation of a defined contribution retirement plan in January 2026.
• Creditors (West Texas National Bank): The company has no outstanding balance on its credit facility and maintains $1,500,000 available, indicating good liquidity relative to its debt. However, declining profitability could impact future covenant compliance if sustained.

Next Steps

• Participate in the drilling and completion of fifty horizontal wells and one vertical well in fiscal year ending March 31, 2026, at an estimated cost of $1,700,000.
• Complete three remaining horizontal wells in Eddy County, New Mexico, in February 2026, with an expenditure of approximately $64,000.
• Evaluate the full impact of the One Big Beautiful Bill (OBBB) on the company's financial statements.
• Establish a defined contribution retirement plan for eligible employees in January 2026.
• Review and potentially participate in other projects, funded from cash balances, cash flow from operations, credit facility borrowings, or sales of non-core properties.

Key Dates

Recommendation

While Mexco Energy experienced a significant decline in net income and EPS due to lower commodity prices, particularly oil, its balance sheet remains strong with increased cash and working capital, and no outstanding debt on its credit facility. The company continues to invest in new wells and acquisitions, and its LLC investment shows a healthy return. The "hold" recommendation reflects the current challenging commodity price environment impacting profitability, but acknowledges the company's solid financial position and ongoing strategic investments that could yield future benefits if market conditions improve. Investors should monitor commodity price trends and the impact of new well completions.

Keywords

Oil and Gas, Energy Exploration, Natural Gas Production, Crude Oil, Permian Basin, Royalty Interests, SEC Filing, Financial Results, E&P, MEXCO Energy