Mexco Energy: Navigating Volatility in a High-Stakes Oil Landscape

Mexco Energy Corporation (NASDAQ: MEXC) has emerged as a microcosm of the broader energy sector's challenges and opportunities. As the company reported its fiscal 2025 results, the data reveals a delicate balancing act between production growth, reserve management, and the relentless volatility of commodity prices. For investors, the question is whether Mexco's strategic bets on oil-heavy assets and Permian Basin infrastructure can offset risks tied to declining reserves and market uncertainty.

Production Growth: A Foundation of Oil Dominance

Mexco's fiscal 2025 performance highlights a clear shift toward oil as its primary revenue driver. In the second quarter (Q2 2025), operating revenues hit $1.75 billion, with oil accounting for 87% of total revenue—a stark contrast to natural gas, which faced price declines due to Permian Basin pipeline bottlenecks. This oil-centric strategy has paid off: net income rose to $317,000, up 17.7% from the prior year.

The company's focus on horizontal drilling in the Delaware and Midland Basins has been pivotal. By participating in 30 horizontal wells and completing 19 in fiscal 2025, Mexco leveraged its Permian Basin acreage to boost production. Meanwhile, strategic acquisitions—such as the $1.5 million purchase of royalty interests in 600 producing wells—expanded its revenue streams without overextending its balance sheet.

Reserve Declines: A Price-Driven Reality

Beneath the revenue growth lies a critical challenge: proved reserves have declined. As of March 31, 2025, proved oil reserves fell by 15% to 675,000 barrels, while natural gas reserves dipped 4% to 4.36 billion cubic feet. These declines were not due to physical depletion but rather lower commodity prices, which reduced the economic viability of certain reserves.

This is a recurring theme in the sector: when prices drop, reserves are “written down” until prices rebound. For Mexco, the focus is on high-return projects in the Delaware Basin's Wolfcamp formation and Midland Basin, where drilling costs are optimized. The company plans to invest $1.2 million in 27 new wells for fiscal 2026, aiming to convert undeveloped reserves into production.

Financial Fortitude Amid Volatility

Mexco's financial health provides a buffer against market swings. With $2.2 million in cash and no debt, the company is less vulnerable to liquidity crunches—a critical advantage in a sector where capex demands are relentless. The stock's recent performance reflects this stability:

Despite quarterly fluctuations, the stock has held above $1.50, with a 52-week high of $2.10. Comparing Mexco's valuation to peers like Pioneer Natural Resources (PXD) or Apache Corporation (APA) reveals a discounted price-to-sales ratio, suggesting undervaluation if production targets are met.

Risks and Uncertainties

1. Price Volatility: Mexco's oil-heavy revenue mix is a double-edged sword. A sustained drop in oil prices (currently ~$75/barrel) could strain margins.
2. Pipeline Constraints: Permian Basin natural gas prices remain depressed due to limited takeaway capacity. Mexco's gas-heavy wells may see prolonged underperformance.
3. Reserve Replacement: The 15% oil reserve decline underscores the need for continuous exploration. Without new discoveries, long-term production could stagnate.

Growth Prospects: Betting on Permian Dominance

Mexco's strategy hinges on the Permian Basin's structural advantages: mature infrastructure, high recovery rates, and proximity to markets. By focusing on low-cost horizontal wells and strategic royalty acquisitions, the company aims to grow production while minimizing capital intensity.

The Delaware Basin's Wolfcamp formation, in particular, offers high EUR (Estimated Ultimate Recovery) wells, with some projects yielding over 1,000 barrels of oil equivalent per day. Mexco's 2026 drilling budget targets this sweet spot, with 80% of wells slated for the basin.

Investment Considerations

• Bull Case: If oil prices stabilize above $70/barrel and Permian pipeline capacity expands, Mexco could see revenue growth of 15-20% annually, supported by its royalty portfolio and drilling pipeline.
• Bear Case: A prolonged price war or regulatory delays in pipeline approvals could force Mexco to curtail drilling, eroding reserves and profitability.

For investors, Mexco offers a high-risk, high-reward profile. Those with a 3-5 year horizon and tolerance for energy sector volatility might consider a position, especially if the stock dips below $1.75. However, short-term traders should avoid it, given its sensitivity to commodity swings.

Conclusion

Mexco Energy is a company at a crossroads. Its fiscal 2025 results demonstrate operational resilience and financial discipline, but its long-term success depends on navigating a volatile market while replenishing reserves. The Permian Basin's potential offers a clear path forward, but execution risks remain. For now, Mexco appears positioned to capitalize on its core strengths—if oil prices cooperate.

Investors should monitor pipeline expansion timelines and Wolfcamp drilling results closely. With the right catalysts, Mexco could become a Permian-era success story—or another casualty of the sector's boom-and-bust cycles. The balance between growth and decline will decide its fate.