Mexco Energy Corp., Midland, Tex., is focused on increasing profit margins by obtaining underdeveloped natural gas properties with low-cost, low-risk operations and long-lived production potential.
Pres. and CEO Nicholas C. Taylor said Mexco strives for a return on its investments of 10 to 1 on a nonrisk-adjusted calculation. This goal is the company's biggest challenge, he said. Another challenge is planning ahead despite the unpredictability of commodity prices.
Of its reserves, 88% are gas. Mexco is comfortable with gas because it has more price stability than oil, yields a higher profit margin than the company's oil reserves, and is a clean fuel, Taylor said.
Mexco's niche involves finding opportunities that other oil and gas companies may have overlooked or not found to their liking for various reasons. Despite the current low rig count, Mexco "is extremely busy" on projects, he said.
"We call ourselves the 'reentry gentry' because we like to work some of the older properties where there are existing wellbores. The property is producing but not producing wellUWe can minimize the cost and maximize profit," Taylor said.
Core areas
Mexco has producing properties and undeveloped acreage, all onshore, in 11 states with 90% of its reserves concentrated in Texas. A future core area could prove to be onshore Louisiana, Taylor said, adding the company is not interested in any projects offshore.
"For our size and scope, we look for things that are going to yield results quickly. Bigger companies can take a longer-range point of view, greater risk, and make greater capital investment. We have to be pretty careful about what we do," he said.
The company holds interests in more than 1,000 wells of which it operates 25-30. Of its operated properties, Mexco holds 90-95% interest, with its partners being its consultants. "We often see opportunities that other companies don't," Taylor said. "We may study an area for several years. It requires a lot of ingenuity, creativity, and thoughtfulness to get that (10:1) rate of return. If it were obvious, somebody else would have seen it and done it," he said.
Having a market capitalization of $14.5 million, Mexco's reserves rose more than 50% year over year. The company is working toward getting approval for a listing on the American Stock Exchange. It currently trades on the OTC Bulletin Board.
Royalty income
To help ensure steady, predictable revenues, Mexco has a significant share of royalty interests. Royalty income has been 15-20% of the company's net income for 3 years. A core royalty area is Gomez field in Pecos County, Tex.
"Those reserves are extremely long-life. Some of them are 50 years and even higher reserve life. It's expense-freeUIt's a good area for upside potential," he said.
Mexco initially bought Gomez field royalties in hopes of a 4:1 rate of return, but with higher natural gas prices, the royalties now are close to the company's 10:1 rate of return, Taylor said.
"When we bought those properties, we could see that they were very long-lived, and we expected gas prices to go up. As prices have risen, they have borne out our anticipation on the kind of returns that we are looking forUThis is the biggest gas field in Texas," Taylor said.
Mexco also explores for new reserves, although drilling expenses last year amounted to less than 10% of its development, exploration, and acquisition costs.
"We often see opportunities that other companies don'tUWe may study an area for several years. It requires a lot of ingenuity, creativity, and thoughtfulness to get that (10:1) rate of return. If it were obvious, somebody else would have seen it and done it."