Replies to post #63 on Mexco Energy Corporation (MXC)

[littlefish]

I've been reviewing all 3 candidates' stance on energy going forward, and IMO we're gonna see a decent shift from the Bush era policies with oil, coal, and nat gas. Here's a little clip about McCain's carbon tax ideas. It would likely make nat gas a little bit more of the fuel of choice vs coal and oil (the other Pres candidates IMO also have this similar tilt/idea with policy). Of course MXC has most of its revs derived from nat gas.

http://www.cbsnews.com/stories/2008/01/11/opinion/main3703074.shtml?source=RSSattr=Opinion_3703074


I'm starting to buy MXC thinking they may fit a nice niche with this kind of either 'carbon tax' or cap and trade implementation. Nat gas will become more popular IMO. Oil and coal will probably get hit pretty hard. Prices of oil and nat gas will probably go up. Alternative renewable energy will also probably become much more popular IMO. But of the main ones used (nat gas, coal, oil) nat gas is the cleanest burning.

MXC has a low cost structure of being profitable even with nat gas prices much lower than current levels. Their revs are going to be likely more than 70% nat gas next Q with the Barnett Shale royalty interest and nat gas has historically been their bigger revs producer vs oil. And they got some work done in their El Cinco fields area that impacted Q1 and Q2 negatively but is now done (typically they avg about $200-$250K per Q for cost of production but Q1 and Q2 08 were a fair amount higher than normal becasue of some work that is now done):

"Production costs increased from $641,371 for the first nine months ended December 31, 2006 to $1,041,405 for the same period of fiscal 2008. This was the result of an increase in repairs and maintenance to operated wells in the El Cinco field and increased production taxes due to the increase in oil and gas sales."


I suspect production costs going forward for next couple Qs will fall more back to the 'normal' range as they did in Q3 08 reported in Feb. 08.

All 3 candidates support some kind of carbon tax. Nat gas is the cleanest of the 'big 3' sources in the US. Of course stuff like wind energy would be great potentially to invest in, but there are few public companies specific to that area in the US.

Here's a little excerpt from a CBC article awhile back about the idea of switching home heating more toward nat gas and away from oil. This also applies to power plants using nat gas instead of say coal, so a carbon tax idea IMO will drive demand more toward nat gas than coal and oil (although obviously nat gas gets hit too, just not as much):

"Quebec is going for the direct levy on all non-renewable fossil fuels sold in bulk to retailers. It has asked the Quebec Energy Board to help work out the exact tax rates and perhaps a sliding scale in which home heating oil might be taxed at a greater rate than natural gas, which is less polluting, in order to encourage homeowners to switch."


Companies like Duke Energy seem to see the merits in a carbon tax and the benefits nat gas may have over oil and coal (of course they get hit too, just not as much so have a bit of competitive advantage with their large nat gas pipeline structure and nat gas power generation), also from same article:

"Some large utilities, notably Duke Energy Corp., a giant gas pipeline and utility operator in the U.S., has publicly called for a national carbon tax as a way of sharing the cost of reducing greenhouse gas emissions across all sectors of the economy."

Plus some of the larger nat gas players like CHK are near new highs while the more oil leaning bigs like XOM have been about the same level as they were last summer (even wth the run in oil and gas).

Just some thoughts. I'll probably cporrect/edit later:)

[littlefish]

Here's another link showing how nat gas as a source for powerplant fuel is worthwhile compared to coal with nat gas prices in the $7 range. This company has proven to be fairly profitable even with nat gas prices in the $6s-$7s.
Of course if nat gas prices go much higher, it becomes less cost effective for nat gas. But that would mean better profit marigns so there's some balancing:

http://pepei.pennnet.com/Articles/Article_Display.cfm?Section=ARTCL&PUBLICATION_ID=6&ARTICLE_ID=313198&C=Depar

[littlefish]

LNG will be a competitor with dry nat gas but much of US LNG in Gulf and other areas of US comes from Trinindad and Tobago, and their nat gas reserves have been shrinking recently. Plus the weak dollar ahs more LNG going to other foreign destinations where higher prices may be fetched (from EIA outlook):


The largest revisions to natural gas reserve estimates were reported for Kazakhstan, Turkmenistan, and China. Kazakhstan added an estimated 35 trillion cubic feet (a 54-percent increase over 2006 proved reserves), Turkmenistan 29 trillion cubic feet (41 percent), and China 27 trillion cubic feet (50 percent). The United States also reported an increase of 12 trillion cubic feet over its 2006 reserves—a 6-percent increase and the largest increment in U.S. annual reserves since 1970. Declines in natural gas reserves were reported for the Netherlands (a decrease of 12 trillion cubic feet), Trinidad and Tobago (7 trillion cubic feet), Argentina (3 trillion cubic feet), Nigeria (3 trillion cubic feet), and Italy, Norway, the United Kingdom, and Saudi Arabia (about 2 trillion cubic feet each).


Also making LNG out of dry gas uses/wastes a fair amount of gas so a flat carbon tax taking into accountfor this waste would mean LNG prices should carry higher costs compared to dry if such a tax were implemented.

But the bigger picture issue is what effects a carbon tax (or cap and trade or whatever) might have on prices for nat gas vs other energy sources IMO going forward. Probably have to wait and see what those things might do once policies are written up.

Seems too hairy for me to comprehend all this unknown stuff LOL so I'll just stick with nat gas prices are around $9 at Henry Hub per mcf and that bodes well for MXC and their recent royalty interest acquisition:)