Mexco Energy Corporation (MXC, AMEX)
Industry: Oil & Gas E&P
Annual report, fiscal year 2013


# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

# FORM 10-K

[√] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2013

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-6694

# MEXCO ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Colorado
(State or other jurisdiction of incorporation or organization)

84-0627918
(I.R.S. Employer Identification No.)

214 W. Texas Avenue, Suite 1101
Midland, Texas
(Address of principal executive offices)

79701
(Zip Code)

Registrant's telephone number, including area code: (432) 682-1119

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.50 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [√]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [√]

Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days. Yes [√] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( \( § 229.405 of this chapter \) ) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [√] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( \( §229.405 \)  of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer [] Accelerated Filer [] Non-Accelerated Filer [] Smaller Reporting Company [√]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [√]

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2012 (the last business day of the Registrant's most recently completed second quarter) was $6,062,046 based on Mexico Energy Corporation's closing common stock price of $6.65 per share on that date as reported by the NYSE MKT.

There were 2,036,866 shares of the registrant's common stock outstanding as of July 1, 2013.

## DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement relating to the 2013 Annual Meeting of Shareholders to be held on September 10, 2013, have been incorporated by reference in Part III of this Form 10-K. Such Proxy Statement will be filed with the Commission not later than 120 days after March 31, 2013, the end of the fiscal year covered by this report.



## TABLE OF CONTENTS

## PART I

Item 1. Business 4
Item 1A. Risk Factors 12
Item 1B. Unresolved Staff Comments 19
Item 2. Properties 19
Item 3. Legal Proceedings 24
Item 4. Mine Safety Disclosures 24

PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 24
Item 6. Selected Consolidated Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 33
Item 9A. Controls and Procedures 34
Item 9B. Other Information 34

PART III

Item 10. Directors, Executive Officers and Corporate Governance 34
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 35
Item 13. Certain Relationships and Related Transactions, and Director Independence 35
Item 14. Principal Accounting Fees and Services 35

PART IV

Item 15. Exhibits and Financial Statement Schedules 35
Signatures 36
Glossary of Abbreviations and Terms 37



As used in this document, “the Company”, “Mexico”, “we”, “us” and “our” refer to Mexico Energy Corporation and its consolidated subsidiaries.

Abbreviations or definitions of certain terms commonly used in the oil and gas industry and in this Form 10-K can be found in the “Glossary of Abbreviations and Terms”.

## PART I

## CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). These forward-looking statements are generally located in the material set forth under the headings “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business”, “Properties” but may be found in other locations as well, and are typically identified by the words “could”, “should”, “expect”, “project”, “estimate”, “believe”, “anticipate”, “intend”, “budget”, “plan”, “forecast”, “predict” and other similar expressions.

Forward-looking statements generally relate to our profitability; planned capital expenditures; estimates of oil and gas production; future project dates; estimates of future oil and gas prices; estimates of oil and gas reserves; our future financial condition or results of operations; and our business strategy and other plans and objectives for future operations and are based upon our management's reasonable estimates of future results or trends. Actual results in future periods may differ materially from those expressed or implied by such forward-looking statements because of a number of risks and uncertainties affecting our business, including those discussed in "Risk Factors". The factors that may affect our expectations regarding our operations include, among others, the following: our success in development, exploitation and exploration activities; our ability to make planned capital expenditures; declines in our production or prices of oil and gas; our ability to raise equity capital or incur additional indebtedness; our restrictive debt covenants; our acquisition and divestiture activities; weather conditions and events; the proximity, capacity, cost and availability of pipelines and other transportation facilities; increases in the cost of drilling, completion and gas gathering or other costs of production and operations; and other factors discussed elsewhere in this document.

We disclaim any intention or obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise.

## ITEM 1. BUSINESS

## General

Mexico Energy Corporation, a Colorado corporation, is an independent oil and gas company engaged in the exploration, development and production of natural gas and crude oil properties located in the United States. Incorporated in April 1972 under the name Miller Oil Company, the Company changed its name to Mexico Energy Corporation effective April 30, 1980. At that time, the shareholders of the Company also approved amendments to the Articles of Incorporation resulting in a one-for-fifty reverse stock split of the Company's common stock.

On December 31, 2012, Mexico acquired all of the outstanding ownership interests of TBO Oil & Gas, LLC, a Texas limited liability company which owns non-operated working interests producing primarily oil.

In September 2010, Mexico acquired all of the issued and outstanding stock of Southwest Texas Disposal Corporation, a Texas corporation which owns royalties producing primarily natural gas.

On February 25, 1997, Mexico acquired all of the issued and outstanding stock of Forman Energy Corporation, a New York corporation also engaged in oil and gas exploration and development.



Our total estimated proved reserves at March 31, 2013 were approximately 7.844 billion cubic feet (“Bcf”) of natural gas and 366,000 barrels (“bbls”) of oil and natural gas liquids, and our estimated present value of proved reserves was approximately $18.0 million based on estimated future net revenues excluding taxes discounted at 10% per annum, pricing and other assumptions set forth in “Item 2 – Properties” below. During fiscal 2013, we added proved reserves of 348,000 thousand cubic feet equivalent (“Mcfe”) through extensions and discoveries, added 359,000 Mcfe through acquisitions and had downward revisions of previous estimates of 649,000 Mcfe.

Nicholas C. Taylor beneficially owns approximately 44% of the outstanding shares of our common stock. Mr. Taylor is also our Chairman of the Board and Chief Executive Officer. As a result, Mr. Taylor has significant influence in matters voted on by our shareholders, including the election of our Board members. Mr. Taylor participates in all facets of our business and has a significant impact on both our business strategy and daily operations.

## Company Profile

Since our inception, we have been engaged in acquiring and developing oil and gas properties and the exploration for and production of natural gas, crude oil, condensate and natural gas liquids (“NGLs”) within the United States. We have focused primarily on acquiring natural gas reserves until 2011 when we changed our focus to oil. We especially seek to acquire proved reserves that fit well with existing operations or in areas where Mexico has established production. Acquisitions preferably will contain most of their value in producing wells, behind pipe reserves and high quality proved undeveloped locations. Competition for the purchase of proved reserves is intense. Sellers often utilize a bid process to sell properties. This process usually intensifies the competition and makes it extremely difficult to acquire reserves without assuming significant price and production risks. We actively search for opportunities to acquire proved oil and gas properties. However, because the competition is intense, we cannot give any assurance that we will be successful in our efforts during fiscal 2014.

While we own oil and gas properties in other states, the majority of our activities are centered in West Texas. We acquire interests in producing and non-producing oil and gas leases from landowners and leaseholders in areas considered favorable for oil and gas exploration, development and production. In addition, we may acquire oil and gas interests by joining in oil and gas drilling prospects generated by third parties. We may also employ a combination of the above methods of obtaining producing acreage and prospects. In recent years, we have placed primary emphasis on the evaluation and purchase of producing oil and gas properties, both working and royalty interests, and prospects that could have a potentially meaningful impact on our reserves.

## Oil and Gas Operations

As of March 31, 2013, natural gas constituted approximately 78% of our total proved reserves and approximately 36% of our revenues for fiscal 2013. Revenues from oil and gas royalty interests accounted for approximately 28% of our revenues for fiscal 2013.

Newark East (Barnett Shale) Gas Field properties, encompassing 6,512 gross acres, 62 net acres, 154 gross producing wells and 1 net well in Denton, Johnson, Tarrant and Wise Counties, Texas, account for approximately 4% of our discounted future net cash flows from proved reserves as of March 31, 2013. For fiscal 2013, this field, consisting of royalty interests, accounted for 7% of our gross revenues, 10% of our net revenues.

El Cinco Gas Field properties, encompassing 1,166 gross acres, 886 net acres, 8 gross producing wells and 6 net wells in Pecos County, Texas, account for approximately 33% of our discounted future net cash flows from proved reserves as of March 31, 2013. This is a multi-pay area where most of the leases have potential reserves in two zones. Of these discounted future net cash flows from proved reserves, approximately 18% are attributable to proven undeveloped reserves which will be developed through re-entry of existing wells and new drilling. For fiscal 2013, these properties accounted for 16% of our gross revenues and 13% of our net revenues.

Gomez Gas Field properties, encompassing 13,058 gross acres, 72 net acres, 26 gross wells and .13 net wells in Pecos County, Texas, account for approximately 2% of our discounted future net cash flows from proved reserves as of March 31, 2013. For fiscal 2013, these properties accounted for 3% of our gross revenues and 4% of our net revenues. All of these properties, except for one, are royalty interests.



The Haynesville area natural gas properties, encompassing 5,135 gross acres, 13 net acres, 8 gross producing wells and .02 net wells in DeSoto Parish, Louisiana, account for approximately 3% of our discounted future net cash flows from proved reserves as of March 31, 2013. Of these discounted future net cash flows from proved reserves, approximately 2% are attributable to proven undeveloped reserves. For fiscal 2013, these properties, consisting of royalty interests, accounted for 1.5% of our gross revenues, 2% of our net revenues. This acreage contains an additional 56 potential drill sites.

The Fuhrman-Mascho field oil properties, encompassing 160 gross acres, 19 net acres, 9 gross producing wells and 1.05 net wells in Andrews County, Texas, account for approximately 4% of our discounted future net cash flows from proved reserves as of March 31, 2013. For fiscal 2013, these properties accounted for 7% of our gross and net revenues. This acreage contains an additional 7 potential drill sites.

We own approximately 1,477 gross and 737 net acres of material undeveloped acreage located above and below the Pembrook Unit of Upton County, Texas which is operated by Pioneer Natural Resources USA, Inc. and held by production from approximately 200 wells. This acreage has the potential for development in the horizontal Wolfcamp formation centered in the southern Midland Basin.

We own interests in and operate 18 producing wells and 1 water injection well. We own partial interests in an additional 3,269 producing wells located in the states of Texas, New Mexico, Oklahoma, Louisiana, Alabama, Mississippi, Arkansas, Wyoming, Kansas, Colorado, Montana and North Dakota. Additional information concerning these properties and our oil and gas reserves is provided below.

The following table indicates our oil and gas production in each of the last five years, all of which is located within the United States:

<table><tr><td>Year</td><td>Oil(Bbls)</td><td>Gas (Mcf)</td></tr><tr><td>2013</td><td>23,260</td><td>401,077</td></tr><tr><td>2012</td><td>19,442</td><td>395,649</td></tr><tr><td>2011</td><td>17,040</td><td>459,446</td></tr><tr><td>2010</td><td>18,036</td><td>545,991</td></tr><tr><td>2009</td><td>17,065</td><td>542,099</td></tr></table>

## Competition and Markets

The oil and gas industry is a highly competitive business. Competition for oil and gas reserve acquisitions is significant. We may compete with major oil and gas companies, other independent oil and gas companies and individual producers and operators, some of which have financial and personnel resources substantially in excess of those available to us. As a result, we may be placed at a competitive disadvantage. Competitive factors include price, contract terms and types and quality of service, including pipeline distribution. The price for oil and gas is widely followed and is generally subject to worldwide market factors. Our ability to acquire and develop additional properties in the future will depend upon our ability to conduct operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment in a timely manner.

In addition, the oil and gas industry as a whole also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers. The price and availability of alternative energy sources could adversely affect our revenue.

Market factors affect the quantities of oil and natural gas production and the price we can obtain for the production from our oil and natural gas properties. Such factors include: the extent of domestic production; the level of imports of foreign oil and natural gas; the general level of market demand on a regional, national and worldwide basis; domestic and foreign economic conditions that determine levels of industrial production; political events in foreign oil-producing regions; and variations in governmental regulations including environmental, energy conservation and tax laws or the imposition of new regulatory requirements upon the oil and natural gas industry.

The market for our oil, gas and natural gas liquids production depends on factors beyond our control including: domestic and foreign political conditions; the overall level of supply of and demand for oil, gas and natural gas liquids; the price of imports of oil and gas; weather conditions; the price and availability of alternative fuels; the proximity and capacity of gas pipelines and other transportation facilities; and overall economic conditions.



## Major Customers

We made sales to the following companies that amounted to 10% or more of revenues for the year ended March 31:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Holly Refining</td><td>26%</td><td>22%</td><td>13%</td></tr><tr><td>Chesapeake Operating</td><td>-</td><td>-</td><td>14%</td></tr></table>

Because a ready market exists for oil and gas production, we do not believe the loss of any individual customer would have a material adverse effect on our financial position or results of operations.

## Regulation

Our exploration, development, production and marketing operations are subject to various types of extensive rules and regulations by federal, state and local authorities. Numerous federal, state and local departments and agencies have issued rules and regulations binding on the oil and gas industry, some of which carry substantial penalties for noncompliance. State statutes and regulations require permits and bonds for drilling operations and reports concerning operations. Most states and some counties and municipalities in which we operate regulate the location of wells; the method of drilling and casing wells; the rates of production or "allowables"; the surface use and restoration of properties upon which wells are drilled; the plugging and abandoning of wells; and notice to, and consultation with, surface owners and other third parties.

There are regulations governing the unitization and pooling of oil and gas properties, the establishment of maximum rates of production from oil and gas wells and the spacing of such wells. State laws regulate the size and shape of drilling and spacing units or proration units and govern the pooling of oil and natural gas properties. Some states allow forced pooling or integration of tracts to facilitate exploration, while other states rely on voluntary pooling of lands and leases. In some instances, forced pooling or unitization may be implemented by third parties and may reduce our interest in the unitized properties. Conservation laws and regulations may limit the rate at which oil and gas otherwise could be produced from our properties, generally prohibit the venting or flaring of natural gas, and impose requirements regarding the ratability of production. These laws and regulations generally are intended to prevent waste of oil and natural gas, and to protect correlative rights to produce oil and natural gas by assigning allowable rates of production to each well or proration unit. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquids within its jurisdiction.

The regulatory burden on the oil and gas industry increases its cost of doing business and, consequently, affects its profitability. Because these rules and regulations are frequently amended or reinterpreted, we are not able to predict the future cost or impact of complying with such laws.

The Federal Energy Regulatory Commission (“FERC”) regulates under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978, interstate natural gas transportation rates and service conditions, which affect the marketing of natural gas we produce, as well as the revenues we receive for sales of such production. Since 1978, various laws have been enacted which have significantly altered the marketing and transportation of gas. These orders resulted in a fundamental restructuring of interstate pipeline sales and transportation services, including the unbundling by interstate pipelines of the sales, transportation, storage and other components of the city-gate sales services such pipelines previously performed. Commencing in 1985, the FERC promulgated a series of orders, regulations and rule makings that significantly fostered competition in the business of transporting and marketing gas. Today, interstate pipeline companies are required to provide nondiscriminatory transportation services to producers, marketers and other shippers, regardless of whether such shippers are affiliated with an interstate pipeline company. FERC’s initiatives have led to the development of a competitive, unregulated, open access market for gas purchases and sales that permits all purchasers of gas to buy gas directly from third-party sellers other than pipelines. However, the natural gas industry historically has been very heavily regulated. Therefore, we cannot guarantee that the less stringent regulatory approach will continue indefinitely into the future, nor can we determine what effect, if any, future regulatory changes might have on our natural gas related activities.



Sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at negotiated market prices. Nevertheless, Congress could reenact price controls in the future. The price we receive from the sale of these products is affected by the cost of transporting the products to market. The FERC regulates interstate crude oil pipeline transportation rates under the Interstate Commerce Act. In general, interstate crude oil pipeline rates must be cost-based, although many pipeline charges are today based on historical rates adjusted for inflation and other factors, and other charges may result from settlement rates agreed to by all shippers or market-based rates, which are permitted in certain circumstances. Intrastate crude oil pipeline transportation rates are subject to regulation by state regulatory commissions. Insofar as the interstate and intrastate transportation rates that we pay are generally applicable to all comparable shippers, we believe that the regulation of crude oil transportation rates will not affect our operations in a way that materially differs from the effect on the operations of our competitors who are similarly situated. Further, interstate and intrastate common carrier crude oil pipelines must provide service on an equitable basis. Under this standard, common carriers must offer service to all similarly situated shippers requesting service on the same terms and under the same rates. When crude oil pipelines operate at full capacity, access is governed by prorating provisions set forth in the pipelines' published tariffs. Accordingly, we believe that access to crude oil pipeline transportation services generally will be available to us to the same extent as to our similarly situated competitors.

## Environmental Matters

By nature of our oil and gas operations, we are subject to extensive federal, state and local environmental laws and regulations controlling the generation, use, storage and discharge of materials into the environment or otherwise relating to the protection of the environment. Numerous governmental departments issue rules and regulations to implement and enforce such laws, which are often difficult and costly to comply with and which carry substantial penalties for failure to comply. These laws and regulations may require the acquisition of a permit before drilling or production commences; restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities; limit or prohibit construction or drilling activities on certain lands lying within protected areas; restrict the rate of oil and gas production; require remedial actions to prevent pollution from former operations; and impose substantial liabilities for pollution resulting from our operations. In addition, these laws and regulations may impose substantial liabilities and penalties for failure to comply with them or for any contamination resulting from our operations. We believe we are in compliance, in all material respects, with applicable environmental requirements. We do not believe costs relating to these laws and regulations have had a material adverse effect on our operations or financial condition in the past. Public interest in the protection of the environment has increased dramatically in recent years. The trend of applying more expansive and stricter environmental legislation and regulations to the natural gas and oil industry could continue, resulting in increased costs of doing business and consequently affecting our profitability. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes more stringent and costly waste handling, disposal and cleanup requirements, our business and prospects could be adversely affected.

The following are some of the existing laws, rules and regulations to which our business is subject:

The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), also known as the “Superfund” law, imposes liability, without regard to fault or the legality of the original conduct, on classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of the disposal site or the site where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances. Under CERCLA, such persons may be subject to joint and several liabilities for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. We are able to control directly the operation of only those wells with respect to which we act as operator. Notwithstanding our lack of direct control over wells operated by others, the failure of an operator other than us to comply with applicable environmental regulations may, in certain circumstances, be attributed to us. We do not believe that we will be required to incur any material capital expenditures to comply with existing environmental requirements.



The federal Clean Air Act (“CAA”), and state air pollution laws and regulations provide a framework for national, state and local efforts to protect air quality. The operations of oil and gas properties utilize equipment that emits air pollutants which may be subject to federal and state air pollution control laws. These laws require utilization of air emissions abatement equipment to achieve prescribed emissions limitations and ambient air quality standards, as well as operating permits for existing equipment and construction permits for new and modified equipment. Permits and related compliance obligations under the CAA, as well as changes to state implementation plans for controlling air emissions in regional non-attainment areas may require oil and natural gas exploration and production operators to incur future capital expenditures in connection with the addition or modification of existing air emission control equipment and strategies. In addition, some oil and natural gas facilities may be included within the categories of hazardous air pollutant sources, which are subject to increasing regulation under the CAA. Failure to comply with these requirements could subject a regulated entity to monetary penalties, injunctions, conditions or restrictions on operations and enforcement actions. Oil and natural gas exploration and production facilities may be required to incur certain capital expenditures in the future for air pollution control equipment in connection with obtaining and maintaining operating permits and approvals for air emissions. We believe that we are in compliance in all material respects with the requirements of applicable federal and state air pollution control laws.

Recent scientific studies have suggested that emissions of certain gases, commonly referred to as greenhouse gases (“GHGs”) and including carbon dioxide and methane, may be contributing to warming of the Earth’s atmosphere. In response to such studies, many nations have agreed to limit emissions of GHGs pursuant to the United Nations Framework Convention on Climate Change and the “Kyoto Protocol.” Although the United States is not participating in the Kyoto Protocol, the U.S. Supreme Court has ruled in Massachusetts, et al. v. EPA, that the Environmental Protection Agency (“EPA”) abused its discretion under the Clean Air Act by refusing to regulate carbon dioxide emissions from mobile sources. As a result of the Supreme Court decision and the change in presidential administrations, on December 7, 2009, the EPA issued a finding that serves as the foundation under the CAA to issue other rules that would result in federal greenhouse gas regulations and emissions limits under the CAA, even without Congressional action. As part of this array of new regulations, on September 22, 2009, the EPA also issued a GHG monitoring and reporting rule that requires certain parties, including participants in the oil and natural gas industry, to monitor and report their GHG emissions, including methane and carbon dioxide, to the EPA. The EPA has issued a notice of finding and determination that emissions of carbon dioxide, methane and other GHGs present an endangerment to human health and the environment, which allows EPA to begin regulating emissions of GHGs under existing provisions of the federal CAA. The EPA has begun to implement GHG-related reporting and permitting rules. Similarly the U.S. Congress has considered and may in the future consider “cap and trade” legislation that would establish an economy-wide cap on emissions of GHGs. The emissions will be published on a register to be made available on the Internet. These regulations may apply to our operations. The EPA has issued two other rules that would regulate GHGs, one of which regulates GHGs from stationary sources, and one which requires sources in the oil and natural gas exploration and production industry and the pipeline industry to report GHG emissions. The EPA’s finding, the GHG reporting rules, and the rules to regulate the emissions of GHGs may affect the outcome of other climate change lawsuits pending in U. S. federal courts in a manner unfavorable to our industry. In addition to the EPA’s actions to regulate GHGs, more than one-third of the states have begun taking action on their own to control and/or reduce emissions of GHGs. Any of the climate change regulatory and legislative initiatives described above in areas in which we conduct business could result in increased compliance costs or additional operating restrictions which could have a material adverse effect on our business, financial condition, and results of operations.

The Resource Conservation and Recovery Act (“RCRA”) and analogous state laws govern the handling and disposal of hazardous and solid wastes. Wastes that are classified as hazardous under RCRA are subject to stringent handling, recordkeeping, disposal and reporting requirements. RCRA specifically excludes from the definition of hazardous waste “drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas or geothermal energy.” However, these wastes may be regulated by the EPA or state agencies as solid waste. Moreover, many ordinary industrial wastes, such as paint wastes, waste solvents, laboratory wastes and waste compressor oils, are regulated as hazardous wastes. Although the costs of managing hazardous waste may be significant, we do not expect to experience more burdensome costs than similarly situated companies.



The Federal Water Pollution Control Act (“Clean Water Act”) and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including produced waters and other oil and gas wastes, into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or the applicable state agency. Although the costs to comply with such mandates under state or federal law may be significant, the entire industry will experience similar costs, and we do not believe that these costs will have a material adverse impact on our financial condition and operations.

The Safe Drinking Water Act (“SDWA”) and the Underground Injection Control (“UIC”) program promulgated under the SDWA and state and local laws regulate the drilling and operation of salt water disposal (“SWD”) wells. Wastewaters produced from oil and gas operations are disposed via underground injection wells. Underground injection is the subsurface placement of fluid through a well, such as the reinjection of brine produced and separated from oil and gas production. The EPA directly administers the UIC program in some states and in others it is delegated to the state for administering. Permits must be obtained before drilling SWD wells and casing integrity monitoring must be conducted periodically to ensure the casing is not leaking saltwater into groundwater. Contamination of groundwater by oil and natural gas drilling, production, and related operations may result in fines, penalties, and remediation costs, amount other sanctions and liabilities under the SDWA and state laws. In addition, third party claims may be filed by landowners and other parties claiming damages for alternative water supplies, property damages, and bodily injury. We currently own interests in various underground injection wells operated by others and failure to abide by their permits could subject those operators to civil and/or criminal enforcement. We believe that they are in compliance in all material respects with the requirements of applicable state underground injection control programs and their permits.

Many of our operations depend on the use of hydraulic fracturing to enhance production from oil and gas wells. This technology involves the injection of fluids—usually consisting mostly of water but typically including small amounts of chemical additives—as well as sand into a well under high pressure in order to create fractures in the rock that allow oil or gas to flow more freely to the wellbore. Many newer wells would not be economical without the use of hydraulic fracturing to stimulate production from the well. We engage third parties to occasionally provide hydraulic fracturing or other well stimulation services to us in connection with many of the wells we operate. Certain states have adopted and are considering laws that would require the disclosure of the chemical constituents in hydraulic fracturing fluids. In addition, in 2010, the EPA announced that it would be conducting a study on the environmental effects of hydraulic fracturing. Additional disclosure requirements could result in delays in operations at existing and new well sites as well as increased costs to make our wells productive which could make it more difficult to perform hydraulic fracturing.

We believe that we are in substantial compliance with all existing environmental laws and regulations applicable to our current operations and that our continued compliance with existing requirements will not have a material adverse impact on our financial condition and results of operations, however we cannot assure you that the passage or application of more stringent laws or regulations in the future will not have an negative impact on our financial position or results of operation. We did not incur any material capital expenditures for remediation or pollution control activities for the year ended March 31, 2013. Additionally, as of the date of this report, we are not aware of any environmental issues or claims that will require material capital expenditures during fiscal 2014.

Various state and federal statutes prohibit certain actions that adversely affect endangered or threatened species and their habitat, migratory birds, wetlands, and natural resources. These statutes include the Endangered Species Act and the Migratory Bird Treaty Act, as well as, the CWA and CERCLA. The United States Fish and Wildlife Service may designate critical habitat and suitable habitat areas that it believes are necessary for survival of threatened or endangered species. A critical habitat or suitable habitat designation could result in further material restrictions to federal land use and private land use and could delay or prohibit land access or development. Where takings of or harm to species or damages to wetlands, habitat, or natural resources occur or may occur, government entities or at times private parties may act to prevent oil and gas exploration activities or seek damages for harm to species, habitat, or natural resources resulting from drilling or construction or releases of oil, wastes, hazardous substances or other regulated materials, and may seek natural resources damages and in some cases, criminal penalties.



## Title to Properties

As is customary in the oil and gas industry, only a preliminary title examination is conducted at the time properties believed to be suitable for drilling operations are acquired by us. Prior to the commencement of drilling operations, a thorough title examination of the drill site tract is conducted and curative work is performed with respect to significant defects, if any, before proceeding with operations. A thorough title examination has been performed with respect to substantially all leasehold producing properties currently owned by us. We believe the title to our leasehold properties is good and defensible in accordance with standards generally acceptable in the oil and gas industry subject to such exceptions that, in the opinion of counsel employed in the various areas in which we have conducted exploration activities, are not so material as to detract substantially from the use of such properties.

The leasehold properties we own are subject to royalty, overriding royalty and other outstanding interests customary in the industry. The properties may be subject to burdens such as liens incident to operating agreements and current taxes, development obligations under oil and gas leases and other encumbrances, easements and restrictions. We do not believe any of these burdens will materially interfere with the use of these properties.

Substantially all of our properties are currently mortgaged under a deed of trust to secure funding through a revolving line of credit.

## Insurance

Our operations are subject to all the risks inherent in the exploration for and development and production of oil and gas including blowouts, fires and other casualties. We maintain insurance coverage customary for operations of a similar nature, but losses could arise from uninsured risks or in amounts in excess of existing insurance coverage.

## Executive Officers

The following table sets forth certain information concerning the executive officers of the Company as of March 31, 2013.

<table><tr><td>Name</td><td>Age</td><td>Position</td></tr><tr><td>Nicholas C. Taylor</td><td>75</td><td>Chairman and Chief Executive Officer</td></tr><tr><td>Tamala L. McComic</td><td>44</td><td>President, Chief Financial Officer, Treasurer, and Assistant Secretary</td></tr><tr><td>Donna Gail Yanko</td><td>68</td><td>Vice President and Secretary</td></tr></table>

Set forth below is a description of the principal occupations during at least the past five years of each executive officer of the Company.

Nicholas C. Taylor was elected Chairman of the Board and Chief Executive Officer of the Company in September 2011 and continues to serve in such capacity on a part time basis, as required. He served as Chief Executive Officer, President and Director of the Company from 1983 to 2011. From July 1993 to the present, Mr. Taylor has been involved in the independent practice of law and other business activities. In November 2005 he was appointed by the Speaker of the House to the Texas Ethics Commission and served until February 2010.

Tamala L. McComic, a Certified Public Accountant, became Controller for the Company in July 2001 and was elected President and Chief Financial Officer in September 2011. She served the Company as Executive Vice President and Chief Financial Officer from 2009 to 2011 and Vice President and Chief Financial Officer from 2003 to 2009. Prior thereto, Ms. McComic was appointed Treasurer and Assistant Secretary of the Company.

Donna Gail Yanko was appointed to the position of Vice President of the Company in 1990. She has also served as Corporate Secretary since 1992 and from 1986 to 1992 was Assistant Secretary. From 1986 to the present, on a part-time basis, she has assisted the Chairman of the Board of the Company in his personal business activities. Ms. Yanko also served as a director of the Company from 1990 to 2008.



## Employees

As of March 31, 2013, we had three full-time and three part-time employees. We believe that relations with these employees are generally satisfactory. From time to time, we utilize the services of independent geological, land and engineering consultants on a limited basis and expect to continue to do so in the future. We also utilize the services of independent contractors to perform well drilling and production operations, including pumping, maintenance, inspection and testing.

## Office Facilities

We maintain our principal offices at 214 W. Texas Avenue, Suite 1101, Midland, Texas pursuant to a month to month lease. On April 1, 2013, we agreed to a three year lease for our 1,573 square feet of office space which will expire on April 1, 2016.

## Access to Company Reports

Mexico Energy Corporation files annual, quarterly and current reports, proxy statements and other information with the Security Exchange Commission ("SEC"). Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet website (www.sec.gov) that contains annual, quarterly and current reports, proxy statements and other information that issuers, including Mexico, file electronically with the SEC.

Mexico also employs the Public Register’s Annual Report Service which can provide you a copy of our annual report at www.prars.com, free of charge, as soon as practicable after providing such report to the SEC.

We also maintain an internet website at www.mexcoenergy.com. In the Investor Relations section, our website contains our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other reports and amendments to those reports as soon as reasonably practicable after such material is electronically filed with the SEC. Information on our website is not incorporated by reference into this Form 10-K and should not be considered part of this report or any other filing that we make with the SEC. Additionally, our Code of Business Conduct and Ethics and the charters of our Audit Committee, Compensation Committee and Nominating Committee are posted on our website. Any of these corporate documents as well as any of the SEC filed reports are available in print free of charge to any stockholder who requests them. Requests should be directed to our corporate Assistant Secretary by mail to P.O. Box 10502, Midland, Texas 79702 or by email to mexco@sbcglobal.net.

## ITEM 1A. RISK FACTORS

There are many factors that affect our business and results of operations, some of which are beyond our control. The following is a description of some of the important factors that could have a material adverse effect on our business, financial position, liquidity and results of operations. Some of the following risks relate principally to the industry in which we operate and to our business. Other risks relate principally to the securities markets and ownership of our common stock.

## RISKS RELATED TO OUR BUSINESS AND INDUSTRY

Volatility of oil and gas prices significantly affects our results and profitability.

Prices for oil and natural gas fluctuate widely. We cannot predict future oil and natural gas prices with any certainty. Historically, the markets for oil and gas have been volatile, and they are likely to continue to be volatile. Factors that can cause price fluctuations include the level of global demand for petroleum products; foreign supply and pricing of oil and gas; the ability of the Organization of Petroleum Exporting Countries ("OPEC") to set and maintain oil price and production controls; nature and extent of governmental regulation and taxation, including environmental regulations; level of domestic and international exploration, drilling and production activity; the cost of exploring for, producing and delivering oil and gas; availability, proximity and capacity of oil and gas pipelines and other transportation facilities; weather conditions; the price and availability of alternative fuels; technological advances affecting energy consumption; and, overall political and economic conditions in oil producing countries.



Increases and decreases in prices also affect the amount of cash flow available for capital expenditures and our ability to borrow money or raise additional capital. The amount we can borrow from banks may be subject to redetermination based on changes in prices. In addition, we may have ceiling test writedowns when prices decline. Lower prices may also reduce the amount of crude oil and natural gas that can be produced economically. Thus, we may experience material increases or decreases in reserve quantities solely as a result of price changes and not as a result of drilling or well performance.

Changes in oil and gas prices impact both estimated future net revenue and the estimated quantity of proved reserves. Any reduction in reserves, including reductions due to price fluctuations, can reduce the borrowing base under our revolving credit facility and adversely affect the amount of cash flow available for capital expenditures and our ability to obtain additional capital for our exploration and development activities.

Oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. Our financial results are more sensitive to movements in natural gas prices than oil prices because most of our production and reserves are natural gas. Continuance of the current low natural gas price environment, further declines in natural gas prices, lack of natural gas storage may have an adverse effect on our financial condition due to reduction of our revenues, operating income and cash flows; curtailment or shut-in of our natural gas production due to lack of transportation or storage capacity; cause certain properties in our portfolio to become economically unviable; and, limit our financial condition, liquidity, and/or ability to finance planned capital expenditures and operations.

Lower oil and gas prices and other factors may cause us to record ceiling test writedowns.

Lower oil and gas prices increase the risk of ceiling limitation write-downs. We use the full cost method to account for oil and gas operations. Accordingly, we capitalize the cost to acquire, explore for and develop crude oil and natural gas properties. Under the full cost accounting rules, the net capitalized cost of crude oil and natural gas properties may not exceed a “ceiling limit” which is based upon the present value of estimated future net cash flows from proved reserves, discounted at 10% plus the lower of cost or fair market value of unproved properties. If net capitalized costs of oil and natural gas properties exceed the ceiling limit, we must charge the amount of the excess against earnings. This is called a “ceiling test writedown.” Under the accounting rules, we are required to perform a ceiling test each quarter. A ceiling test writedown does not impact cash flow from operating activities, but does reduce stockholders’ equity and earnings. The risk that we will be required to write down the carrying value of oil and natural gas properties increases when oil and natural gas prices are low. For 2013, 2012 and 2011, there was no ceiling test impairment on our oil and gas properties.

Information concerning our reserves and future net revenues estimates is inherently uncertain.

Estimates of oil and gas reserves, by necessity, are projections based on engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that are difficult to measure. Estimates of economically recoverable oil and gas reserves and of future net cash flows depend upon a number of variable factors and assumptions, such as future production, oil and gas prices, operating costs, development costs and remedial costs, all of which may vary considerably from actual results. As a result, estimates of the economically recoverable quantities of oil and gas and of future net cash flows expected therefrom may vary substantially. As required by the SEC, the estimated discounted future net cash flows from proved reserves are based on a twelve month un-weighted first-day-of-the-month average oil and gas prices for the twelve months prior to the date of the report. Actual future prices and costs may be materially higher or lower.



An increase in the differential between NYMEX and the reference or regional index price used to price our oil and gas would reduce our cash flow from operations.

Our oil and gas is priced in the local markets where it is produced based on local or regional supply and demand factors. The prices we receive for our oil and gas are typically lower than the relevant benchmark prices, such as The New York Mercantile Exchange (“NYMEX”). The difference between the benchmark price and the price we receive is called a differential. Numerous factors may influence local pricing, such as refinery capacity, pipeline capacity and specifications, upsets in the midstream or downstream sectors of the industry, trade restrictions and governmental regulations. Additionally, insufficient pipeline capacity, lack of demand in any given operating area or other factors may cause the differential to increase in a particular area compared with other producing areas. During fiscal 2013, differentials averaged $2.71 per Bbl of oil and $0.20 per Mcf of gas. Increases in the differential between the benchmark prices for oil and gas and the wellhead price we receive could significantly reduce our revenues and our cash flow from operations.

## We must replace reserves we produce.

Our future success depends upon our ability to find, develop or acquire additional, economically recoverable oil and gas reserves. Our proved reserves will generally decline as reserves are depleted, except to the extent that we can find, develop or acquire replacement reserves. One offset to the obvious benefits afforded by higher product prices especially for small to mid-cap companies in this industry, is that quality domestic oil and gas reserves are hard to find.

Approximately 38% of our total estimated net proved reserves at March 31, 2013 and 2012, were undeveloped, and those reserves may not ultimately be developed.

Recovery of undeveloped reserves requires significant capital expenditures and successful drilling. Our reserve data assumes that we can and will make these expenditures and conduct these operations successfully. These assumptions, however, may not prove correct. If we or the outside operators of our properties choose not to spend the capital to develop these reserves, or if we are not able to successfully develop these reserves, we will be required to write-off these reserves. Any such write-offs of our reserves could reduce our ability to borrow money and could reduce the value of our common stock.

## Our exploration and development drilling may not result in commercially productive reserves.

New wells that we drill may not be productive, or we may not recover all or any portion of our investment in such wells. The seismic data and other technologies we use do not allow us to know conclusively prior to drilling a well that crude oil or natural gas is present or may be produced economically. Drilling for crude oil and natural gas often involves unprofitable efforts, not only from dry holes but also from wells that are productive but do not produce sufficient net reserves to return a profit at then realized prices after deducting drilling, operating and other costs. The cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a project.

Acquisitions are subject to the risks and uncertainties of evaluating reserves and potential liabilities and may be disruptive and difficult to integrate into our business.

We plan to continue growing our reserves through acquisitions. Acquired properties can be subject to significant unknown liabilities. Prior to completing an acquisition, it is generally not feasible to conduct a detailed review of each individual property to be acquired in an acquisition. Even a detailed review or inspection of each property may not reveal all existing or potential liabilities associated with owning or operating the property. Moreover, some potential liabilities, such as environmental liabilities related to groundwater contamination, may not be discovered even when a review or inspection is performed. Our initial reserve estimates for acquired properties may be inaccurate. Downward adjustments to our estimated proved reserves, including reserves added through acquisitions, could require us to write down the carrying value of our oil and gas properties, which would reduce our earnings and our stockholders' equity. In addition, we may have to assume cleanup or reclamation obligations or other unanticipated liabilities in connection with these acquisitions. The scope and cost of these obligations may ultimately be materially greater than estimated at the time of the acquisition.



We may not be able to fund the capital expenditures that will be required for us to increase reserves and production.

We must make capital expenditures to develop our existing reserves and to discover new reserves. Historically, we have used our cash flow from operations and borrowings under our revolving credit facility to fund our capital expenditures and we expect to continue to do so in the future.

Volatility in oil and gas prices, the timing of our drilling programs and drilling results will affect our cash flow from operations. Lower prices and/or lower production will also decrease revenues and cash flow, thus reducing the amount of financial resources available to meet our capital requirements, including reducing the amount available to pursue our drilling opportunities. If our cash flow from operations does not increase as a result of planned capital expenditures, a greater percentage of our cash flow from operations will be required for debt service and operating expenses and our planned capital expenditures would, by necessity, be decreased.

The borrowing base under our credit facility will be determined from time to time by the lender. Reductions in estimates of oil and gas reserves could result in a reduction in the borrowing base, which would reduce the amount of financial resources available under the credit facility to meet our capital requirements. Such a reduction could be the result of lower commodity prices and/or production, inability to drill or unfavorable drilling results, changes in oil and gas reserve engineering, the lenders' inability to agree to an adequate borrowing base or adverse changes in the lenders' practices regarding estimation of reserves.

If cash flow from operations or our borrowing base decrease for any reason, our ability to undertake exploration and development activities could be adversely affected. As a result, our ability to replace production may be limited. In addition, if the borrowing base under the credit facility is reduced, we would be required to reduce our borrowings under the credit facility so that such borrowings do not exceed the borrowing base. This could further reduce the cash available to us for capital spending and, if we did not have sufficient capital to reduce our borrowing level, we may be in default under the credit facility.

Failure to comply with covenants under our debt agreement could adversely impact our financial condition and results of operations.

Our revolving credit facility agreement requires us to comply with certain customary covenants including limitations on disposition of assets, mergers and reorganizations. We are also obligated to meet certain financial covenants. For example, our revolving credit facility requires us to, among other things, maintain tangible net worth in accordance with computational guidelines contained in the related loan agreement. If we fail to meet any of these loan covenants, the lender under the revolving credit facility could accelerate the indebtedness and seek to foreclose on the pledged assets.

Drilling and operating activities are high risk activities that subject us to a variety of factors that we can not control.

These factors include availability of workover and drilling rigs, well blowouts, cratering, explosions, fires, formations with abnormal pressures, pollution, releases of toxic gases and other environmental hazards and risks. Any of these operating hazards could result in substantial losses to us. In addition, we incur the risk that no commercially productive reservoirs will be encountered, and there is no assurance that we will recover all or any portion of its investment in wells drilled or re-entered.

The unavailability or high cost of additional drilling rigs, equipment, supplies, personnel and oilfield services could adversely affect our ability to execute our exploration and development plans within our budget and on a timely basis.

Shortages or the high cost of drilling rigs, equipment, supplies, personnel or oilfield services could delay or cause us to incur significant expenditures that are not provided for in our capital budget, which could have a material adverse effect on our business, financial condition or results of operations.



Our identified drilling locations are scheduled out over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling.

Our management has specifically identified and scheduled drilling locations as an estimation of our future multi-year drilling activities on our existing acreage. These drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of uncertainties, including crude oil and natural gas prices, the availability of capital, costs, drilling results, regulatory approvals and other factors. If future drilling results in these projects do not establish sufficient reserves to achieve an economic return, we may curtail drilling in these projects. Because of these uncertainties, we do not know if the numerous potential drilling locations we have identified will ever be drilled or if we will be able to produce crude oil or natural gas from these or any other potential drilling locations.

We have limited control over activities on properties we do not operate, which could reduce our production and revenues.

A substantial amount of our business activities are conducted through joint operating or other agreements under which we own working and royalty interests in natural gas and oil properties in which we do not operate. As a result, we have a limited ability to exercise influence over normal operating procedures, expenditures or future development of underlying properties and their associated costs. The failure of an operator of our wells to adequately perform operations could reduce our revenues and production.

Our business depends on oil and natural gas transportation facilities which are owned by others.

The marketability of our production depends in part on the availability, proximity and capacity of natural gas gathering systems, pipelines and processing facilities. Federal and state regulation of oil and gas production and transportation, tax and energy policies, changes in supply and demand and general economic conditions could all affect our ability to produce and market our oil and gas.

The oil and gas industry is highly competitive.

Competition for oil and gas reserve acquisitions is significant. We may compete with major oil and gas companies, other independent oil and gas companies and individual producers and operators, some of which have financial and personnel resources substantially in excess of those available to us. As a result, we may be placed at a competitive disadvantage. Our ability to acquire and develop additional properties in the future will depend upon our ability to select and acquire suitable producing properties and prospects for future development activities. In addition, the oil and gas industry as a whole also competes with other industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers. The price and availability of alternative energy sources could adversely affect our revenue. The market for our oil, gas and natural gas liquids production depends on factors beyond our control, including domestic and foreign political conditions, the overall level of supply of and demand for oil, gas and natural gas liquids, the price of imports of oil and gas, weather conditions, the price and availability of alternative fuels, the proximity and capacity of gas pipelines and other transportation facilities and overall economic conditions.

We may not be insured against all of the operating hazards to which our business is exposed.

Our operations are subject to all the risks inherent in the exploration for, and development and production of oil and gas including blowouts, fires and other casualties. We maintain insurance coverage customary for operations of a similar nature, but losses could arise from uninsured risks or in amounts in excess of existing insurance coverage.



Our business is subject to extensive environmental regulations, and to laws that can give rise to liabilities from environmental contamination.

Our operations are subject to extensive federal, state and local environmental laws and regulations, which impose limitations on the discharge of pollutants into the environment, establish standards for the management, treatment, storage, transportation and disposal of hazardous materials and of solid and hazardous wastes, and impose obligations to investigate and remediate contamination in certain circumstances. Liabilities to investigate or remediate contamination, as well as other liabilities concerning hazardous materials or contamination such as claims for personal injury or property damage, may arise at many locations, including properties in which we have an ownership interest but no operational control, properties we formerly owned or operated and sites where our wastes have been treated or disposed of, as well as at properties that we currently own or operate. Such liabilities may arise even where the contamination does not result from any noncompliance with applicable environmental laws. Under a number of environmental laws, such liabilities may also be joint and several, meaning that we could be held responsible for more than our share of the liability involved, or even the entire share. Environmental requirements generally have become more stringent in recent years, and compliance with those requirements more expensive.

Increased regulation of hydraulic fracturing could result in reductions or delays in drilling and completing new oil and natural gas wells, which could adversely impact our revenues.

Legislation has been introduced in the U.S. Congress to amend the federal SDWA to subject hydraulic fracturing operations to regulation under the SDWA and to require the disclosure of chemicals used by the oil and gas industry in the hydraulic fracturing process. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formations to stimulate gas and oil production. We engage third parties to provide hydraulic fracturing or other well stimulation services to us in connection with wells for which we are the operator. The proposed legislation as well as laws being considered by certain states and other agencies would require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process are impairing groundwater or causing other damage. In March 2010, the EPA announced that it would conduct a wide-ranging study on the effects of hydraulic fracturing on human health and the environment. This study and enforcement initiative could result in additional regulatory scrutiny that could make it difficult to perform hydraulic fracturing and increase our costs of compliance and doing business.

Increases in taxes on energy sources may adversely affect the company’s operations.

Federal, state and local governments which have jurisdiction in areas where the company operates impose taxes on the oil and natural gas products sold. Historically, there has been an on-going consideration by federal, state and local officials concerning a variety of energy tax proposals. Such matters are beyond the company's ability to accurately predict or control.

Certain U.S. federal income tax deductions currently available with respect to oil and gas exploration and development may be eliminated as a result of future legislation.

Legislation has been proposed that would, if enacted into law, make significant changes to U. S. federal income tax laws, including the elimination of certain key U.S. federal income tax deductions currently available to oil and natural gas exploration and production companies. These changes include, but are not limited to: (1) the repeal of the percentage depletion allowance for oil and natural gas properties, (2) the elimination of current deductions for intangible drilling and development costs, (3) the elimination of the deduction for certain domestic production activities, and (4) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear whether any such changes will be enacted or how soon any such changes could become effective. The passage of this legislation or any other similar changes in the U. S. federal income tax laws could eliminate or defer certain tax deductions that are currently available with respect to oil and gas exploration and development, and any such change could negatively affect our financial condition and results of operations.



The loss of our chief executive officer or other key personnel could adversely impact our ability to execute our business strategy.

We depend, and will continue to depend in the foreseeable future, upon the continued services of our Chief Executive Officer, Nicholas C. Taylor, our President and Chief Financial Officer, Tamala L. McComic, and other key personnel, who have extensive experience and expertise in evaluating and analyzing producing oil and gas properties and drilling prospects, maximizing production from oil and gas properties and developing and executing acquisitions and financing. We do not have key-man insurance on the lives of Mr. Taylor and Ms. McComic. The unexpected loss of the services of one or more of these individuals could, therefore, significantly and adversely affect our operations. Competition for qualified individuals is intense and we may be unable to find or attract qualified replacements for our officers and key employees on acceptable terms.

We may be affected by one substantial shareholder.

Nicholas C. Taylor beneficially owns approximately 44% of the outstanding shares of our common stock. Mr. Taylor is also our Chairman of the Board and Chief Executive Officer. As a result, Mr. Taylor has significant influence in matters voted on by our shareholders, including the election of our Board members. Mr. Taylor participates in all facets of our business and has a significant impact on both our business strategy and daily operations. The retirement, incapacity or death of Mr. Taylor, or any change in the power to vote shares beneficially owned by Mr. Taylor, could result in negative market or industry perception and could have an adverse effect on our business.

## RISKS RELATED TO OUR COMMON STOCK

We have not and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

We have paid no cash dividends on our common stock to date and it is not anticipated that any will be paid to holders of our common stock in the foreseeable future. The terms of our existing credit facility restricts the payment of dividends without the prior written consent of the lenders. We currently intend to retain all future earnings to fund the development and growth of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. Stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment.

We may issue additional shares of common stock in the future, which could cause dilution to all shareholders.

We may seek to raise additional equity capital in the future. Any issuance of additional shares of our common stock will dilute the percentage ownership interest of all shareholders and may dilute the book value per share of our common stock.

Control by our executive officers and directors may limit your ability to influence the outcome of matters requiring stockholder approval and could discourage our potential acquisition by third parties.

As of March 31, 2013, our executive officers and directors beneficially owned approximately 45% of our common stock. These stockholders, if acting together, would be able to influence significantly all matters requiring approval by our stockholders, including the election of our board of directors and the approval of mergers or other business combination transactions.



The price of our common stock has been volatile and could continue to fluctuate substantially.

Mexico common stock is traded on the NYSE MKT. The market price of our common stock has and could continue to experience volatility due to reasons unrelated to our operating performance. These reasons include: supply and demand for natural gas and oil; political conditions in natural gas and oil producing regions; demand for our common stock and limited trading volume; investor perception of our industry; fluctuations in commodity prices; variations in our results of operations; legislative or regulatory changes; general trends in the oil and natural gas industry; market conditions and analysts' estimates; and, other events in the oil and gas oil industry. Many of these factors are beyond our control, and we cannot predict their potential effects on the price of our common stock. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. In addition, the stock markets in general can experience considerable price and volume fluctuations.

Failure of the Company’s internal control over financial reporting could harm its business and financial results.

The management of Mexico is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect Mexico's transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the financial statements; providing reasonable assurance that receipts and expenditures are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis.

## ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

## ITEM 2. PROPERTIES

Our properties consist primarily of oil and gas wells and our ownership in leasehold acreage, both developed and undeveloped. As of March 31, 2013, we had interests in 3,288 gross (29.3 net) oil and gas wells and owned leasehold mineral and royalty interests in approximately 357,499 gross (3,942 net) acres.

## Oil and Natural Gas Reserves

In accordance with current SEC rules, the average prices used in computing reserves at March 31, 2013 were $85.53 per bbl of oil and $93.75 in 2012, a decrease of 9%, and $2.76 per mcf of natural gas and $3.83 in 2012, a decrease of 28%, such prices are based on the 12-month unweighted arithmetic average market prices for sales of oil and natural gas on the first calendar day of each month during fiscal 2013. The benchmark price of $89.17 per bbl of oil at March 31, 2013 versus $94.65 at March 31, 2012, was adjusted by lease for gravity, transportation fees and regional price differentials. The benchmark price of $2.95 per mcf of natural gas at March 31, 2013 versus $3.73 at March 31, 2012, was adjusted by lease for BTU content, transportation fees and regional price differentials. The average prices used in computing reserves at March 31, 2011 were $77.27 per bbl of oil and $3.88 per mcf of natural gas. The benchmark prices used in computing reserves at March 31, 2011 were $80.04 per bbl of oil and $4.11 per mcf of natural gas.

For information concerning our costs incurred for oil and gas operations, net revenues from oil and gas production, estimated future net revenues attributable to our oil and gas reserves, present value of future net revenues discounted at 10% and changes therein, see Notes to the Company’s consolidated financial statements.



The engineering report with respect to Mexico’s estimates of proved oil and gas reserves as of March 31, 2013, 2012 and 2011 is based on evaluations prepared by Joe C. Neal and Associates, Petroleum and Environmental Engineering Consultants, based in Midland, Texas (“Neal and Associates”) and is filed as Exhibit 99.1 to this annual report.

Management maintains internal controls designed to provide reasonable assurance that the estimates of proved reserves are computed and reported in accordance with rules and regulations provided by the SEC. As stated above, Mexico retained Neal and Associates to prepare estimates of our oil and gas reserves. Management works closely with this firm, and is responsible for providing accurate operating and technical data to it. Our Chief Financial Officer who has over 19 years experience in the oil and gas industry reviews the final reserves estimate and consults with a agreed geological consultant with extensive geological experience and if necessary, discusses the process used and findings with Mr. Neal. Mr. Neal is responsible for overseeing the preparation of the reserve estimates and holds a bachelor's degree in mechanical engineering (petroleum option), is a member of the Society of Petroleum Engineers and has over 50 years of experience in the oil and gas industry. Our Chairman and Chief Executive Officer who has over 30 years experience in the oil and gas industry also reviews the final reserves estimate.

Numerous uncertainties exist in estimating quantities of proved reserves. Reserve estimates are imprecise and subjective and may change at any time as additional information becomes available. Furthermore, estimates of oil and gas reserves are projections based on engineering data. There are uncertainties inherent in the interpretation of this data as well as the projection of future rates of production. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment.

Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves will most likely vary from the assumptions and estimates. Any significant variance could materially affect the estimated quantities and value of our oil and gas reserves, which in turn may adversely affect our cash flow, results of operations and the availability of capital resources.

Per the current SEC rules, the prices used to calculate our proved reserves and the present value of proved reserves set forth herein are made using the 12-month unweighted arithmetic average of the first-day-of-the-month price. All prices are held constant throughout the life of the properties. Actual future prices and costs may be materially higher or lower than those as of the date of the estimate. The timing of both the production and the expenses with respect to the development and production of oil and gas properties will affect the timing of future net cash flows from proved reserves and their present value. Except to the extent that we acquire additional properties containing proved reserves or conduct successful exploration and development activities, or both, our proved reserves will decline as reserves are produced.

We have not filed any other oil or gas reserve estimates or included any such estimates in reports to other federal or foreign governmental authority or agency during the year ended March 31, 2013, and no major discovery is believed to have caused a significant change in our estimates of proved reserves since that date.

Proved reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods. Proved undeveloped reserves are proved reserves that are expected to be recovered from new wells drilled to known reservoirs on undrilled acreage for which the existence and recoverability of such reserves can be estimated with reasonable certainty, or from existing wells on which a relatively major expenditure is required to establish production.

Our estimated proved oil and gas reserves and present value of estimated future net revenues from proved oil and gas reserves in the periods ended March 31 are summarized below.



## PROVED RESERVES

<table><tr><td rowspan="2"></td><td colspan="3">March 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Oil (BbIs):</td><td></td><td></td><td></td></tr><tr><td>Proved developed - Producing</td><td>232,850</td><td>178,410</td><td>156,346</td></tr><tr><td>Proved developed - Non-producing</td><td>4,570</td><td>16,210</td><td>3,629</td></tr><tr><td>Proved undeveloped</td><td>128,290</td><td>151,730</td><td>130,187</td></tr><tr><td>Total</td><td>365,710</td><td>346,350</td><td>290,162</td></tr><tr><td>Natural gas (Mcf):</td><td></td><td></td><td></td></tr><tr><td>Proved developed - Producing</td><td>3,727,710</td><td>3,491,920</td><td>3,895,656</td></tr><tr><td>Proved developed - Non-producing</td><td>1,079,310</td><td>1,867,750</td><td>1,068,405</td></tr><tr><td>Proved undeveloped</td><td>3,037,180</td><td>3,085,060</td><td>3,792,974</td></tr><tr><td>Total</td><td>7,844,200</td><td>8,444,730</td><td>8,757,035</td></tr><tr><td>Total net proved reserves (Mcfe)</td><td>10,038,460</td><td>10,522,830</td><td>10,498,007</td></tr><tr><td>PV-10 Value (1)</td><td>$ 17,788,790</td><td>$ 24,953,450</td><td>$ 22,653,390</td></tr><tr><td>Present value of future income tax discounted at 10%</td><td>(3,419,790)</td><td>(5,597,450)</td><td>(5,001,390)</td></tr><tr><td>Standardized measure of discounted future net cash flows (2)</td><td>$ 14,369,000</td><td>$ 19,356,000</td><td>$ 17,652,000</td></tr><tr><td>Prices used in Calculating Reserves: (3)</td><td></td><td></td><td></td></tr><tr><td>Natural gas (per Mcf)</td><td>$ 2.76</td><td>$ 3.83</td><td>$ 3.88</td></tr><tr><td>Oil (per Bbl)</td><td>$ 85.53</td><td>$ 93.75</td><td>$ 77.27</td></tr></table>

(1) The PV-10 Value represents the discounted future net cash flows attributable to our proved oil and gas reserves before income tax, discounted at 10% per annum, which is the most directly comparable GAAP financial measure. PV-10 is relevant and useful to investors because it presents the discounted future net cash flows attributable to our estimated net proved reserves prior to taking into account future corporate income taxes. Further, investors may utilize the measure as a basis for comparison of the relative size and value of our reserves to other companies. We use this measure when assessing the potential return on investment related to our oil and natural gas properties. Our reconciliation of this non-GAAP financial measure is shown in the table as the PV-10, less future income taxes, discounted at 10% per annum, resulting in the standardized measure of discounted future net cash flows. The standardized measure of discounted future net cash flows represents the present value of future cash flows attributable to our proved oil and natural gas reserves after income tax, discounted at 10%.

(2) In accordance with SEC requirement, the standardized measure of discounted future net cash flows was computed by applying 12-month average prices for oil and gas during the fiscal year to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on year-end statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less tax basis of the properties and available credits, and assuming continuation of existing economic conditions.

(3) These prices reflect adjustment by lease for quality, transportation fees and regional price differentials.

During the fiscal year ending March 31, 2013, 7 wells in which we own a royalty interest were developed converting reserves of approximately 18,000 mcf from proved undeveloped to proved developed - producing. We participated in the development of 33 wells converting reserves of approximately 137,000 mcf from proved undeveloped to proved developed - producing. The capital cost was approximately $368,000 for the 33 wells in which we own a working interest.



Oil and gas prices significantly impact the calculation of the PV-10 and the standardized measure of discounted future net cash flows. The present value of future net cash flows does not purport to be an estimate of the fair market value of the Company's proved reserves. An estimate of fair value would also take into account, among other things, anticipated changes in future prices and costs, the expected recovery of reserves in excess of proved reserves and a discount factor more representative of the time value of money and the risks inherent in producing oil and gas. Future prices received for production and costs may vary, perhaps significantly, from the prices and costs assumed for purposes of these estimates. The 10% discount factor used to calculate present value, which is required by Financial Accounting Standards Board (“FASB”) pronouncements, may not necessarily be the most appropriate discount rate. The present value, no matter what discount rate is used, is materially affected by assumptions as to timing of future production, which may prove to be inaccurate.

## Productive Wells and Acreage

Productive wells consist of producing wells and wells capable of production, including gas wells awaiting pipeline connections. Wells that are completed in more than one producing zone are counted as one well. The following table indicates our productive wells as of March 31, 2013:

<table><tr><td>Oil</td><td>Gross</td><td>Net</td></tr><tr><td>Gas</td><td>2,012</td><td>16.3</td></tr><tr><td>Total Productive Wells</td><td>1,276</td><td>13.0</td></tr><tr><td></td><td>3,288</td><td>29.3</td></tr></table>

The following table sets forth the approximate developed acreage in which we held a leasehold mineral or other interest as of March 31, 2013:

<table><tr><td rowspan="2"></td><td colspan="2">Developed Acres</td></tr><tr><td>Gross</td><td>Net</td></tr><tr><td>Texas</td><td>193,922</td><td>3,124</td></tr><tr><td>New Mexico</td><td>27,669</td><td>491</td></tr><tr><td>Oklahoma</td><td>50,167</td><td>215</td></tr><tr><td>Louisiana</td><td>36,401</td><td>51</td></tr><tr><td>Kansas</td><td>8,520</td><td>24</td></tr><tr><td>North Dakota</td><td>26,654</td><td>23</td></tr><tr><td>Montana</td><td>7,868</td><td>5</td></tr><tr><td>Wyoming</td><td>3,578</td><td>5</td></tr><tr><td>Alabama</td><td>640</td><td>2</td></tr><tr><td>Mississippi</td><td>640</td><td>1</td></tr><tr><td>Colorado</td><td>1,120</td><td>1</td></tr><tr><td>Arkansas</td><td>320</td><td>-</td></tr><tr><td>Total</td><td>357,499</td><td>3,942</td></tr></table>

Undeveloped acreage includes leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves. A gross acre is an acre in which an interest is owned. A net acre is deemed to exist when the sum of fractional ownership interests in gross acres equals one. The number of net acres is the sum of the fractional interests owned in gross acres. As of March 31, 2013, we own approximately 1,477 gross and 737 net acres of material undeveloped acreage located above and below the Pembrook Unit of Upton County, Texas which is operated by Pioneer Natural Resources USA, Inc. and held by production from approximately 200 wells. This acreage has the potential for exploration and development in multiple Wolfcamp zones by horizontal drilling.



## Drilling Activities

The following table sets forth our drilling activity in wells in which we own a working interest for the years ended March 31:

<table><tr><td rowspan="3"></td><td colspan="6">Year Ended March 31,</td></tr><tr><td colspan="2">2013</td><td colspan="2">2012</td><td colspan="2">2011</td></tr><tr><td>Gross</td><td>Net</td><td>Gross</td><td>Net</td><td>Gross</td><td>Net</td></tr><tr><td>Exploratory Wells</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Productive</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Nonproductive</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td>
d
 </tr><tr><td>Total</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Development Wells</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Productive</td><td>38</td><td>.52</td><td>54</td><td>1.55</td><td>8</td><td>.17</td></tr><tr><td>Nonproductive</td><td>1</td><td>.01</td><td>-</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Total</td><td>39</td><td>.53</td><td>54</td><td>1.55</td><td>8</td><td>.17</td></tr></table>

The information contained in the foregoing table should not be considered indicative of future drilling performance, nor should it be assumed that there is any necessary correlation between the number of productive wells drilled and the amount of oil and gas that may ultimately be recovered by us.

## Net Production, Unit Prices and Costs

The following table summarizes our net oil and natural gas production, the average sales price per barrel (“bbl”) of oil and per thousand cubic feet (“mcf”) of natural gas produced and the average production (lifting) cost per unit of production for the years ended March 31:

<table><tr><td rowspan="2"></td><td colspan="4">Year Ended March 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td><td></td></tr><tr><td>Oil (a):</td><td></td><td></td><td></td><td></td></tr><tr><td>Production (Bbls)</td><td>23,260</td><td>19,442</td><td>17,040</td><td></td></tr><tr><td>Revenue</td><td>$ 1,961,766</td><td>$ 1,810,459</td><td>$ 1,332,395</td><td></td></tr><tr><td>Average Bbls per day</td><td>64</td><td>53</td><td>47</td><td></td></tr><tr><td>Average sales price per Bbl</td><td>$ 84.34</td><td>$ 93.12</td><td>$ 78.19</td><td></td></tr><tr><td>Gas (b):</td><td></td><td></td><td></td><td></td></tr><tr><td>Production (Mcf)</td><td>401,077</td><td>395,649</td><td>459,446</td><td></td></tr><tr><td>Revenue</td><td>$ 1,101,941</td><td>$ 1,413,200</td><td>$ 1,812,852</td><td></td></tr><tr><td>Average Mcf per day</td><td>1,099</td><td>1,084</td><td>1,259</td><td></td></tr><tr><td>Average sales price per Mcf</td><td>$ 2.75</td><td>$ 3.57</td><td>$ 3.95</td><td></td></tr><tr><td>Production cost:</td><td></td><td></td><td></td><td></td></tr><tr><td>Production cost</td><td>$ 843,277</td><td>$ 669,615</td><td>$ 772,500</td><td></td></tr><tr><td>Production and ad valorem taxes</td><td>$ 238,766</td><td>$ 256,600</td><td>$ 253,432</td><td></td></tr><tr><td>Equivalent Mcf (c)</td><td>540,637</td><td>512,301</td><td>561,686</td><td></td></tr><tr><td>Production cost per equivalent Mcf</td><td>$ 1.56</td><td>$ 1.31</td><td>$ 1.38</td><td></td></tr><tr><td>Production cost per sales dollar</td><td>$ 0.28</td><td>$ 0.21</td><td>$ 0.25</td><td></td></tr><tr><td>Total oil and gas revenue</td><td>$ 3,063,707</td><td>$ 3,223,659</td><td>$ 3,145,247</td><td></td></tr></table>

(a) Includes condensate.

(b) Includes natural gas products.

(c) Oil production is converted to equivalent mcf at the rate of 6 mcf per bbl, representing the estimated relative energy content of natural gas to oil.



## ITEM 3. LEGAL PROCEEDINGS

We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. We are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under various environmental protection statutes or other regulations to which we are subject.

## ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

## PART II

## ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

## Market Information

In September 2003, our common stock began trading on the NYSE MKT, formerly the American Stock Exchange, under the symbol “MXC”. Prior to September 2003, the Company’s common stock was traded on the over-the-counter bulletin board market under the symbol “MEXC”. The registrar and transfer agent is Computershare Trust Company N.A., 250 Royal Street, Canton, Massachusetts, 02021 (Tel: 800-962-4284). The following table sets forth certain information as to the high and low sales price quoted for Mexco’s common stock on the NYSE MKT.

<table><tr><td></td><td>High</td><td>Low</td></tr><tr><td>2013:</td><td></td><td></td></tr><tr><td>April - June 2012</td><td>$ 8.25</td><td>$ 5.45</td></tr><tr><td>July - September 2012</td><td>7.14</td><td>5.68</td></tr><tr><td>October - December 2012</td><td>6.90</td><td>5.13</td></tr><tr><td>January - March 2013</td><td>7.20</td><td>5.16</td></tr><tr><td>2012:</td><td></td><td></td></tr><tr><td>April - June 2011</td><td>$ 13.62</td><td>$ 8.03</td></tr><tr><td>July - September 2011</td><td>9.89</td><td>6.01</td></tr><tr><td>October - December 2011</td><td>7.95</td><td>5.30</td></tr><tr><td>January - March 2012</td><td>11.25</td><td>6.68</td></tr></table>

On June 17, 2013, the closing sales price of our common stock on the NYSE MKT was $5.75 per share.

## Stockholders

As of March 31, 2013, we had approximately 2,102,866 shares issued and 948 shareholders of record which does not include shareholders for whom shares are held in a “nominee” or “street” name.

## Dividends

We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings and other cash resources, if any, for the operation and development of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. In addition, our current bank loan prohibits us from paying cash dividends on our common stock. Any future dividends may also be restricted by any loan agreements which we may enter into from time to time.



## Securities Authorized for Issuance Under Compensation Plans

The following table includes certain information about our Employee Incentive Stock Plan as of March 31, 2013, each of which has been approved by our stockholders.

<table><tr><td></td><td>Number of Shares Authorized for Issuance under Plan</td><td>Number of Shares to be Issued upon Exercise of Outstanding Options</td><td>Weighted Average Exercise Price of Outstanding Options</td><td>Number of Shares Remaining Available for Future Issuance under Plan</td></tr><tr><td>2009 Plan</td><td>200,000</td><td>80,000</td><td>$ 6.52</td><td>120,000</td></tr><tr><td>Total</td><td>200,000</td><td>80,000</td><td>$ 6.52</td><td>120,000</td></tr></table>

## Issuer Repurchases

In June 2012, the board of directors authorized the use of up to $250,000 to repurchase shares of our common stock for the treasury account. This program does not have an expiration date. Under the repurchase program, shares of common stock may be purchased from time to time through open market purchases or other transactions. The amount and timing of repurchases will be subject to the availability of stock, prevailing market conditions, the trading price of the stock, our financial performance and other conditions. Repurchases may also be made from time-to-time in connection with the settlement our share-based compensation awards. Repurchases will be funded from cash flow from operations.

The following table provides information related to repurchases of our common stock for the treasury account during the year ended March 31, 2013:

<table><tr><td>Total Number of Shares Purchased</td><td>Average Price Paid per Share</td><td>Total Number of Shares Purchased as Part of Publicly Announced Program</td><td>Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (1)</td></tr><tr><td>2,833</td><td>$ 5.49</td><td>2,833</td><td>$234,453</td></tr></table>

(1) The program authorizing the use of up to $250,000 to repurchase shares of our common stock for the treasury account was approved by the board of directors on June 29, 2012 and does not have an expiration date. As of March 31, 2013, 2,833 shares of Mexico's common stock have been purchased for a total of $15,547.

During the fiscal year ended March 31, 2013, we repurchased 2,833 shares for the treasury at an aggregate cost of $15,547. During fiscal 2012, we repurchased 4,000 shares at an aggregate cost of $22,780. During fiscal 2011, we repurchased 2,000 shares at an aggregate cost of $12,325.

## ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

Not applicable.

## ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to provide information relevant to an understanding of our financial condition, changes in our financial condition and our results of operations and cash flows and should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-K.



## Liquidity and Capital Resources and Commitments

Historically, we have funded our operations, acquisitions, exploration and development expenditures from cash generated by operating activities, bank borrowings and issuance of common stock. Our primary financial resource is our base of oil and gas reserves. We pledge our producing oil and gas properties to secure our revolving line of credit. We do not have any delivery commitments to provide a fixed and determinable quantity of our oil and gas under any existing contract or agreement.

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 in areas with significant development potential.

We had working capital of $309,180 as of March 31, 2013 compared to working capital of $476,960 as of March 31, 2012, a decrease of $167,780.

For the year ending March 31, 2013, cash flow from operations was $811,874, a 48% decrease when compared to the corresponding period of fiscal 2012. Cash of $1,300,151 was used for additions to oil and gas properties, $1,150,000 was used for the acquisition of TBO as defined below and net proceeds from long-term debt was $1,250,000. Accordingly, net cash decreased $332,275.

At March 31, 2013, we reported estimated PUDs of 3.8 bcfe, which accounted for 38% of our total estimated proved oil and gas reserves. This figure primarily consists of a projected thirty-three (33) new wells, four (4) of which we operate, and one new zone behind pipe from a currently producing wellbore that we also operate. We project two (2) operated wells to be drilled in fiscal 2014 with the two (2) remaining in fiscal 2015. Regarding the remaining 29 PUD locations operated by others, three (3) wells currently are being drilled and three (3) locations currently are being prepared to drill with plans for eighteen (18) wells to follow in 2014, three (3) wells in 2015 and two (2) wells in 2016.

On December 31, 2012, the Company purchased all of the outstanding ownership interests of TBO Oil & Gas, LLC (“TBO”), a Texas limited liability company which owns non-operated working interests producing primarily oil. The cash purchase price of $1,150,000 was funded from our $4.9 million bank credit facility. These interests cover approximately 280 wells located in 16 counties in Texas, New Mexico and North Dakota.

## Texas

On October 1, 2012, the Company sold all of its 31.25% working interest in the Brown #1 SWD wellbore in Ward County, Texas for approximately $47,000. Also, a joint venture in which we are a working interest partner sold its interest in some lease acreage in Culberson and Reagan Counties, Texas and Richland County, Montana for approximately $21,000.

In March 2011, we purchased approximately 10.8% working interest (7.77% net revenue interest) in 160 gross acres containing five (5) wells in the Fuhrman-Mascho Field of Andrews County, Texas, for an approximate cash purchase price of $670,000 funded from our $4.9 million credit facility. In March 2012, we purchased an additional working interest in this acreage for an approximate cash purchase price of $275,000. We now own an approximate 16.2% working interest (11.66% net revenue interest). Two (2) additional wells were drilled during fiscal 2012 and another two (2) wells during fiscal 2013. Our share of the costs for these last 2 wells through March 31, 2013 was approximately $230,000. This acreage now contains nine (9) wells operated by Cone and Petree Oil & Gas Exploration, Inc. – four (4) producing oil from the San Andres formation, four (4) producing oil from the Grayburg and San Andres formations, and one (1) recently drilled and currently being completed. All wells are at an approximate depth of 5,000 feet. This property contains an additional seven (7) potential drill sites in the Grayburg and San Andres formations with four (4) planned to be drilled in fiscal 2014.

We participated in the drilling of two (2) approximately 12,600' development wells in the Cotton Valley-Bossier formation in the Teague Field of Freestone County, Texas. These wells have been completed and began producing in July 2012. The 680-acre unit, operated by Valence Operating Company, now contains four (4) producing wells. Mexico's working interest in this unit is 4.2% (3.7% net revenue interest). Our share of the costs to drill and complete these wells through March 31, 2013 was approximately $204,000.



We acted as operator and drilled a development well in Pecos County, Texas in which Mexco owns 100% working interest (78.8% net revenue interest). This well has been completed, reworked and placed on production making approximately four (4) bbls of crude oil per day. Mexco is continuing to test this well. Our costs to drill, complete and rework this well through March 31, 2013 were approximately $1,299,000.

We participated in the drilling of four (4) horizontal wells in the Penn Detrital formation of the F A Hogg Field of Winkler County, Texas. Three of these wells have been completed and are currently producing with the fourth well currently undergoing completion procedures. The four units, operated by OGX Operating, LLC, contain approximately 1,800 acres. Mexco's working interests in these wells range from .2919% to .4167% (.2275% to .3125% net revenue interest). Our share of the costs to drill and complete these wells through March 31, 2013 was approximately $18,000.

We participated in the drilling of six (6) horizontal wells in the Wolfcamp formation of the Lin Field of Reagan County, Texas. Three (3) of these wells have been completed and are currently producing. The other three (3) wells have been drilled and are currently undergoing completion procedures. The unit, operated by EOG Resources, Inc., contains approximately 1,000 acres. Mexco's working interests in these wells range from .2917% to .8086% (.2188% to .6064% net revenue interest). Our share of the costs to drill and complete these wells through March 31, 2013 was approximately $60,000.

We participated in the drilling of two (2) development wells in the Wolfcamp formation of the Clyde-Reynolds Field of Glasscock County, Texas. These wells, drilled to a depth of approximately 9,800', have been completed and began producing in March 2013. The two units, operated by McClure Oil Company, Inc., contain approximately 1,200 acres. Our share of the costs to drill and complete these wells through March 31, 2013 for our 1% working interest (.75% net revenue interest) was approximately $14,000.

## New Mexico

We have been scheduled to participate in thirty-seven (37) infill wells in the Yeso/Paddock formations of the Dodd-Federal Unit in the Grayburg San Andres Jackson Field of Eddy County, New Mexico. Twenty-five (25) of these wells have already been drilled with the balance to be drilled in the next twelve months to a total depth of approximately 5,000 feet. The unit, operated by Concho Resources, Inc., currently contains approximately one hundred seventy-four (174) producing wells. Mexco's working interest in this unit is .1848% (.14% net revenue interest). Our share of the costs to drill and complete these wells through March 2013 was approximately $96,000.

A joint venture in which we are a working interest owner began drilling the second of two (2) development wells in the Delaware and Bone Spring Sand formations on a 160-acre tract in Eddy County, New Mexico which currently contains four (4) producing wells. Our share of the costs to drill and complete both of these wells through March 31, 2013 for our approximate 1% working interest was approximately $47,000.

Three joint ventures in which we are a working interest owner began drilling one (1) vertical and three (3) horizontal development wells in Lea County, New Mexico. One horizontal well is on a 560-acre tract and is to be completed in the Abo formation. Another horizontal well is to be completed in the Brushy Canyon formation. The other two (2) wells are on a 640-acre tract which contains six (6) wells currently producing and are to be completed in Bone Spring Sand formation. Our share of the costs to drill and complete these wells through March 31, 2013 for our approximate 1% working interest was approximately $226,000.

We participated in the drilling of four (4) horizontal wells in the Bone Springs formation of Lea County, Texas. Three (3) of these wells are operated by COG Operating, LLC, two (2) of which have been completed and are currently producing with the third well being drilled. The fourth well is operated by Manzano, LLC and is currently undergoing completion procedures. Subsequently, COG began drilling another well in this formation in April 2013. Mexco's working interests in these wells range from .125% to .25% (.1875% to .2125% net revenue interest). Our share of the costs to drill and complete these wells through March 31, 2013 was approximately $29,000.



## Oklahoma

We participated in the drilling of one (1) horizontal well in a 640 acre unit in the Cottage Grove formation of Ellis County, Oklahoma. This well, operated by Mewbourne Oil Company, has been completed and began producing in February 2013. Initial production rates per day on February 6, 2013 were 1,178 bbl of crude oil and 3.997 million cubic feet of natural gas. In April 2013, Mewbourne announced plans to drill two (2) more wells on this acreage. Mexico’s working interest in this unit is 1.2% (.9878% net revenue interest). Our share of the costs to drill and complete this first well through March 31, 2013 was approximately $41,000.

## North Dakota

We are scheduled to participate in six (6) horizontal infill wells on a 1,280-acre unit and four (4) horizontal infill wells on a 1,920-acre unit in the Bakken and Three Forks formations of the Catwalk Creek Field of Williams County, North Dakota. The first of these wells on a 15-month schedule is planned to begin drilling in June 2013. Mexico’s working interest in the 1,280-acre unit is .234% (.205% net revenue interest) and .0521% (.0453% net revenue interest) in the 1,920-acre unit. As of March 31, 2013, there were no costs associated with these wells.

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 our common stock. See Note 5 of Notes to Consolidated Financial Statements for a description of our revolving credit agreement with Bank of America, N.A.

Crude oil and natural gas prices have fluctuated significantly in recent years. The effect of declining product prices on our business is significant. Lower product prices reduce our cash flow from operations and diminish the present value of our oil and gas reserves. Lower product prices also offer us less incentive to assume the drilling risks that are inherent in our business. The volatility of the energy markets makes it extremely difficult to predict future oil and natural gas price movements with any certainty. For example in the last twelve months, the West Texas Intermediate (“WTI”) posted price for crude oil has ranged from a low of $74.25 per bbl in June 2012 to a high of $102.75 per bbl in May 2012. The Henry Hub Spot Market Price (“Henry Hub”) for natural gas has ranged from a low of $1.82 per MMBtu in April 2012 to a high of $4.08 per MMBtu in March 2013. On March 31, 2013 the WTI posted price for crude oil was $93.75 per bbl and the Henry Hub spot price for natural gas was $4.03 per MMBtu. Management is of the opinion that cash flow from operations and funds available from financing will be sufficient to provide adequate liquidity for the next fiscal year.

## Results of Operations

## Fiscal 2013 Compared to Fiscal 2012

There was a net loss of $176,374 for the year ended March 31, 2013 compared to net income of $329,993 for the year ended March 31, 2012.

Oil and gas sales. Revenue from oil and gas sales was $3,063,707 for the year ended March 31, 2013, a 5% decrease from $3,223,659 for the year ended March 31, 2012. This resulted from an increase in oil and gas production partially offset by a decrease in oil and gas price. The following table sets forth our oil and gas revenues, production quantities and average prices received during the fiscal years ended March 31:

<table><tr><td></td><td>2013</td><td>2012</td><td>% Difference</td></tr><tr><td>Oil:</td><td></td><td></td><td></td></tr><tr><td>Revenue</td><td>$ 1,961,766</td><td>$ 1,810,459</td><td>8.4%</td></tr><tr><td>Volume (bbls)</td><td>23,260</td><td>19,442</td><td>19.7%</td></tr><tr><td>Average Price (per bbl)</td><td>$ 84.34</td><td>$ 93.12</td><td>(9.4%)</td></tr><tr><td>Gas:</td><td></td><td></td><td></td></tr><tr><td>Revenue</td><td>$ 1,101,941</td><td>$ 1,413,200</td><td>(22.0%)</td></tr><tr><td>Volume (mcf)</td><td>401,077</td><td>395,649</td><td>1.4%</td></tr><tr><td>Average Price (per mcf)</td><td>$ 2.75</td><td>$ 3.57</td><td>(23.0%)</td></tr></table>



Production and exploration. Production costs were $1,082,043 in fiscal 2013, a 17% increase from $926,215 in fiscal 2012. This was primarily the result of repairs on our El Cinco field operated wells in Pecos County, Texas during fiscal 2013.

Depreciation, depletion and amortization. Depreciation, depletion and amortization (“DD&A”) expense was $1,100,425 in fiscal 2013, a 10% increase from $996,205 in fiscal 2012. This was due to an increase in oil and gas production and an increase in the full cost pool amortization base partially offset by a decrease in oil and gas reserves.

General and administrative expenses. General and administrative expenses were $1,028,846 for the year ended March 31, 2013, an 8% increase from $950,690 for the year ended March 31, 2012. This was primarily due to an increase in insurance, salaries and stock option compensation expense.

Interest expense. Interest expense was $53,832 in fiscal 2013, an 87% increase from $28,840 in fiscal 2012, due to an increase in borrowings.

Income taxes. There was an income tax benefit of $31,504 in fiscal 2013 compared to $27,960 in fiscal 2012. The effective tax rate for fiscal 2013 was (15%) compared to (9%) for fiscal 2012.

## Fiscal 2012 Compared to Fiscal 2011

Net income was $329,993 for the year ended March 31, 2012, a 112% increase from $155,696 for the year ended March 31, 2011.

Oil and gas sales. Revenue from oil and gas sales was $3,223,659 for the year ended March 31, 2012, a 2% increase from $3,145,247 for the year ended March 31, 2011. This resulted from an increase in oil price and production partially offset by a decrease in gas price and production. The following table sets forth our oil and gas revenues, production quantities and average prices received during the fiscal years ended March 31:

<table><tr><td></td><td>2012</td><td>2011</td><td>% Difference</td></tr><tr><td>Oil:</td><td></td><td></td><td></td></tr><tr><td>Revenue</td><td>$ 1,810,459</td><td>$ 1,332,395</td><td>35.9%</td></tr><tr><td>Volume (bbls)</td><td>19,442</td><td>17,040</td><td>14.1%</td></tr><tr><td>Average Price (per bbl)</td><td>$ 93.12</td><td>$ 78.19</td><td>19.1%</td></tr><tr><td>Gas:</td><td></td><td></td><td></td></tr><tr><td>Revenue</td><td>$ 1,413,200</td><td>$ 1,812,852</td><td>(22.0%)</td></tr><tr><td>Volume (mcf)</td><td>395,649</td><td>459,446</td><td>(13.9%)</td></tr><tr><td>Average Price (per mcf)</td><td>$ 3.57</td><td>$ 3.95</td><td>(9.6%)</td></tr></table>

Production and exploration. Production costs were $926,215 in fiscal 2012, a 10% decrease from $1,025,932 in fiscal 2011. This was primarily the result of last year's workover and repairs on one of our operated wells in Hutchinson County, Texas in which we own a 100% working interest.

Depreciation, depletion and amortization. Depreciation, depletion and amortization (“DD&A”) expense was $996,205 in fiscal 2012, a 5% decrease from $1,047,906 in fiscal 2011, primarily due to a decrease in gas production partially offset by an increase to the full cost pool amortization base and a decrease in gas reserves partially offset by an increase in oil reserves.

General and administrative expenses. General and administrative expenses were $950,690 for the year ended March 31, 2012, an 8% increase from $877,790 for the year ended March 31, 2011. This was primarily due to an increase in stock option compensation expense.

Interest expense. Interest expense was $28,840 in fiscal 2012, a 21% decrease from $36,361 in fiscal 2011, due to a decrease in borrowings.



Income taxes. There was an income tax benefit of $27,960 in fiscal 2012 compared to an income tax benefit of $15,596 in fiscal 2011. This benefit was mainly the result of an increase in intangible drilling costs. The effective tax rate for fiscal 2012 was (9%) compared to (11%) for fiscal 2011.

## Contractual Obligations

We have no off-balance sheet debt or unrecorded obligations and have not guaranteed the debt of any other party. The following table summarizes our future payments we are obligated to make based on agreements in place as of March 31, 2013:

<table><tr><td rowspan="2"></td><td colspan="5">Payments due in (1):</td></tr><tr><td>Total</td><td>less than 1 year</td><td>1 - 3 years</td><td>3 years</td><td></td></tr><tr><td>Contractual obligations:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Secured bank line of credit</td><td>$ 2,950,000</td><td>$ -</td><td>$ 2,950,000</td><td>$ -</td><td></td></tr></table>

(1) Does not include estimated interest of $79,650 less than 1 year and $238,950 1-3 years.

These amounts represent the balances outstanding under the bank line of credit. These repayments assume that interest will be paid on a monthly basis and that no additional funds will be drawn.

## Alternative Capital Resources

Although we have primarily used cash from operating activities and funding from the line of credit as our primary capital resources, we have in the past, and could in the future, use alternative capital resources. These could include joint ventures, carried working interests and the sale of assets and/or issuances of common stock through a private placement or public offering of our common stock.

## Other Matters

## Critical Accounting Policies and Estimates

In preparing financial statements, management makes informed judgments, estimates and assumptions and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews its estimates, including those related to litigation, environmental liabilities, income taxes, fair value and determination of proved reserves. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

The following represents those policies that management believes are particularly important to the financial statements and that require the use of estimates and assumptions to describe matters that are inherently uncertain.

Full Cost Method of Accounting for Crude Oil and Natural Gas Activities. SEC Regulation S-X defines the financial accounting and reporting standards for companies engaged in crude oil and natural gas activities. Two methods are prescribed: the successful efforts method and the full cost method. We have chosen to follow the full cost method under which all costs associated with property acquisition, exploration and development are capitalized. We also capitalize internal costs that can be directly identified with acquisition, exploration and development activities and do not include any costs related to production, general corporate overhead or similar activities. The carrying amount of oil and gas properties also includes estimated asset retirement costs recorded based on the fair value of the asset retirement obligation ("ARO") when incurred.



Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a country. Under the successful efforts method, geological and geophysical costs and costs of carrying and retaining undeveloped properties are charged to expense as incurred. Costs of drilling exploratory wells that do not result in proved reserves are charged to expense. Depreciation, depletion, amortization and impairment of crude oil and natural gas properties are generally calculated on a well by well or lease or field basis versus the "full cost" pool basis. Additionally, gain or loss is generally recognized on all sales of crude oil and natural gas properties under the successful efforts method. As a result our financial statements will differ from companies that apply the successful efforts method since we will generally reflect a higher level of capitalized costs as well as a higher DD&A rate on our crude oil and natural gas properties.

At the time it was adopted, management believed that the full cost method would be preferable, as earnings tend to be less volatile than under the successful efforts method. However, the full cost method makes us more susceptible to significant non-cash charges during times of volatile commodity prices because the full cost pool may be impaired when prices are low. These charges are not recoverable when prices return to higher levels. Our crude oil and natural gas reserves have a relatively long life. However, temporary drops in commodity prices can have a material impact on our business including impact from the full cost method of accounting.

Ceiling Test. Companies that use the full cost method of accounting for oil and gas exploration and development activities are required to perform a ceiling test each quarter. The full cost ceiling test is an impairment test to determine a limit, or ceiling, on the book value of oil and gas properties. That limit is basically the after tax present value of the future net cash flows from proved crude oil and natural gas reserves, excluding future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, plus the lower of cost or fair market value of unproved properties. If net capitalized costs of crude oil and natural gas properties exceed the ceiling limit, we must charge the amount of the excess to earnings. This is called a "ceiling limitation write-down." This charge does not impact cash flow from operating activities, but does reduce our stockholders' equity and reported earnings.

The risk that we will be required to write down the carrying value of crude oil and natural gas properties increases when crude oil and natural gas prices are depressed or volatile. In addition, write-downs may occur if we experience substantial downward adjustments to our estimated proved reserves or if purchasers cancel long-term contracts for natural gas production. An expense recorded in one period may not be reversed in a subsequent period even though higher crude oil and natural gas prices may have increased the ceiling applicable to the subsequent period.

Estimates of our proved reserves are based on the quantities of oil and gas that engineering and geological analysis demonstrates, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. Our reserve estimates and the projected cash flows are derived from these reserve estimates, in accordance with SEC guidelines by an independent engineering firm based in part on data provided by us. The accuracy of a reserve estimate is a function of the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions, and the judgment of the persons preparing the estimate. Estimates prepared by other third parties may be higher or lower than those included herein. Because these estimates depend on many assumptions, all of which may substantially differ from future actual results, reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify material revisions to the estimate.

It should not be assumed that the present value of future net cash flows is the current market value of our estimated proved reserves. In accordance with SEC requirements, the cost ceiling represents the present value (discounted at 10%) of net cash flows from sales of future production using the average price over the prior 12-month period.

The estimates of proved reserves materially impact DD&A expense. If the estimates of proved reserves decline, the rate at which we record DD&A expense will increase, reducing future net income. Such a decline may result from lower market prices, which may make it uneconomic to drill for and produce higher cost projects.



Use of Estimates. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make informed judgments, estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. In addition, significant estimates are used in determining year end proved oil and gas reserves. Although management believes its estimates and assumptions are reasonable, actual results may differ materially from those estimates. The estimate of our oil and natural gas reserves, which is used to compute DD&A and impairment of oil and gas properties, is the most significant of the estimates and assumptions that affect these reported results.

Excluded Costs. Oil and gas properties include costs that are excluded from capitalized costs being amortized. These amounts represent investments in unproved properties and major development projects. These costs are excluded until proved reserves are found or until it is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if impairment has occurred. The amount of any impairment is transferred to the capitalized costs being amortized (the DD&A pool). Impairments transferred to the DD&A pool increase the DD&A rate.

Revenue Recognition. We recognize crude oil and natural gas revenue from our interest in producing wells as crude oil and natural gas is sold from those wells, net of royalties. We utilize the sales method to account for gas production volume imbalances. Under this method, income is recorded based on our net revenue interest in production taken for delivery.

Asset Retirement Obligations. The estimated costs of plugging, restoration and removal of facilities are accrued. The fair value of a liability for an asset's retirement obligation is recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated by the units of production method. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. For all periods presented, we have included estimated future costs of abandonment and dismantlement in the full cost amortization base and amortize these costs as a component of our depletion expense.

## Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Topic 820: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No. 2011-04 clarifies application of fair value measurements and disclosure requirements and is effective for Mexico as of April 1, 2012. The adoption of ASU 2011-04 did not have a material effect on our consolidated financial statements.

There were various other accounting standards and interpretations issued during our fiscal year, all of which have been determined to be not applicable or significant by management to have a material impact on the Company’s financial position, operations or cash flows.

## ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary source of market risk for us includes fluctuations in commodity prices and interest rates. All of our financial instruments are for purposes other than trading.

Commodity Risk. At March 31, 2013, we had not entered into any hedge arrangements, commodity swap agreements, commodity futures, options or other similar agreements relating to crude oil and natural gas. Effective April 1, 2013 and expiring on March 31, 2015, Mexico entered into a 24 month swap agreement with Merrill Lynch Commodities, Inc. for 500 bbls of crude oil per month at a fixed price of $90.00 per bbl. Settlement price for any settlement period will be based upon reported crude oil pricing on the New York Mercantile Exchange (“NYMEX”) West Texas Intermediate (“WTI”). If the settled oil price in any month during the agreement period is one dollar per barrel more or less than the fixed price of $90.00 per bbl the effect to the Company would be $500 for that month.



Interest Rate Risk. On March 31, 2013, we had an outstanding loan balance of $2,950,000 under our $4.9 million revolving credit agreement, which bears interest at an annual rate equal to the British Bankers Association London Interbank Offered Rate ("BBA LIBOR") daily floating rate, plus 2.5 percentage points. If the interest rate on our bank debt increases or decreases by one percentage point our annual pretax income would change by $29,500 based on borrowings at March 31, 2013.

Credit Risk. Credit risk is the risk of loss as a result of nonperformance by other parties of their contractual obligations. Our primary credit risk is related to oil and gas production sold to various purchasers and the receivables are generally not collateralized. At March 31, 2013, our largest credit risk associated with any single purchaser was $127,632 or 24% of our total oil and gas receivables. We are also exposed to credit risk in the event of nonperformance from any of our working interest partners. At March 31, 2013, our largest credit risk associated with any working interest partner was $3,032 or 19% of our total trade receivable. We have not experienced any significant credit losses.

Energy Price Risk. Our most significant market risk is the pricing for natural gas and crude oil. Our financial condition, results of operations, and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. Prices for oil and natural gas fluctuate widely. We cannot predict future oil and natural gas prices with any certainty. Historically, the markets for oil and gas have been volatile, and they are likely to continue to be volatile. Factors that can cause price fluctuations include the level of global demand for petroleum products, foreign supply of oil and gas, the establishment of and compliance with production quotas by oil-exporting countries, weather conditions, the price and availability of alternative fuels and overall political and economic conditions in oil producing countries. Declines in oil and natural gas prices will materially adversely affect our financial condition, liquidity, ability to obtain financing and operating results. Changes in oil and gas prices impact both estimated future net revenue and the estimated quantity of proved reserves. Any reduction in reserves, including reductions due to price fluctuations, can reduce the borrowing base under our revolving credit facility and adversely affect the amount of cash flow available for capital expenditures and our ability to obtain additional capital for our acquisition, exploration and development activities. In addition, a noncash write-down of our oil and gas properties could be required under full cost accounting rules if prices declined significantly, even if it is only for a short period of time. See Critical Accounting Policies and Estimates — Ceiling Test under Item 7 of this report on Form 10-K. Lower prices may also reduce the amount of crude oil and natural gas that can be produced economically. Thus, we may experience material increases or decreases in reserve quantities solely as a result of price changes and not as a result of drilling or well performance.

Similarly, any improvements in oil and gas prices can have a favorable impact on our financial condition, results of operations and capital resources. Oil and natural gas prices do not necessarily fluctuate in direct relationship to each other. Our financial results are more sensitive to movements in natural gas prices than oil prices because most of our production and reserves are natural gas. If the average oil price had increased or decreased by one dollar per barrel for fiscal 2013, our oil and gas revenue would have changed by $23,131. If the average gas price had increased or decreased by one dollar per mcf for fiscal 2013, oil and gas revenue would have changed by $401,077.

## ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item appears on pages F1 through F20 hereof and are incorporated herein by reference.

## ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.



## ITEM 9A. CONTROLS AND PROCEDURES

Management’s Annual Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and implemented by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our principal executive officer and principal financial officer evaluate the effectiveness of our internal control over financial reporting based on the framework in “Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under that framework and applicable SEC rules, our management concluded that our internal control over financial reporting was effective as of March 31, 2013.

This annual report does not include an attestation of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to audit by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting. No changes in the Company’s internal control over financial reporting occurred during the year ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis. At the end of the period covered by this report, our principal executive officer and principal financial officer reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(f). Based on such evaluation, such officers concluded that, as of March 31, 2013, our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is disclosed within the time periods specified in the SEC’s rules and forms and are effective to ensure that information required to be disclosed by us is accumulated and communicated to them to allow timely decisions regarding required disclosure.

## ITEM 9B. OTHER INFORMATION

None

## PART III

## ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

See "Mexico Energy Corporation Board of Directors", "Named Executive Officers Who Are Not Directors", "Section 16(a) Beneficial Ownership Reporting Compliance", "Corporate Governance and Code of Business Conduct" and "Meetings and Committees of the Board of Directors" in the Proxy Statement of Mexico Energy Corporation for our Annual Meeting of Stockholders to be held September 10, 2013 ("Proxy Statement") to be filed with the SEC within 120 days after the end of our fiscal year ended March 31, 2013, which is incorporated herein by reference.



The information required by this item with respect to executive officers of the Company is also set forth in Part I of this report.

## ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be contained in the Proxy Statement under the caption “Executive Compensation”, and is hereby incorporated herein by reference.

## ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item will be contained in the Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Employee Incentive Stock Option Plans”, and is hereby incorporated herein by reference.

## ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item will be contained in the Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Meetings and Committees of the Board of Directors”, and is hereby incorporated by reference herein.

## ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item will be contained in the Proxy Statement under the caption “Audit Fees and Services”, and is hereby incorporated by reference herein.

## PART IV

## ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Consolidated Financial Statements. For a list of the consolidated financial statements filed as part of this Form 10-K, see the “Index to Consolidated Financial Statements” set forth on page F1 of this report.

Financial Statement Schedules. All schedules have been omitted because they are not applicable, not required under the instructions or the information requested is set forth in the consolidated financial statements or related notes thereto.

Exhibits. For a list of the exhibits required by this Item and accompanying this Form 10-K see the “Index to Exhibits” set forth on page F21 of this report.



## SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MEXCO ENERGY CORPORATION

By: /s/ Nicholas C. Taylor
Chairman of the Board and Chief Executive Officer
By: /s/ Tamala L. McComic
President and Chief Financial Officer

Dated: July 1, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of July 1, 2013, by the following persons on behalf of the Registrant and in the capacity indicated.

/s/ Nicholas C. Taylor
Nicholas C. Taylor
Chief Executive Officer, Chairman of the Board of Directors

/s/ Tamala L. McComic
Tamala L. McComic
Chief Financial Officer, President, Treasurer and Assistant Secretary

/s/ Kenneth L. Clayton
Kenneth L. Clayton
Director

/s/ Thomas R. Craddick
Thomas R. Craddick
Director

/s/ Paul G. Hines
Paul G. Hines
Director

/s/ Jack D. Ladd
Jack D. Ladd
Director



## Glossary of Abbreviations and Terms

The following are abbreviations and definitions of terms commonly used in the oil and gas industry and this report.

BBA LIBOR. British Bankers Association London Interbank Offered Rate. BBA Libor is the most widely used rate for short term interest rates worldwide.

Bbl. One stock tank barrel, or 42 U.S. gallons of liquid volume, used herein in reference to crude oil, condensate or natural gas liquids hydrocarbons.

Bcf. One billion cubic feet of natural gas at standard atmospheric conditions.

BTU. British thermal unit.

Completion. The installation of permanent equipment for the production of oil or natural gas.

Condensate. Liquid hydrocarbons associated with the production of a primarily natural gas reserve.

Credit Facility. A line of credit provided by a group of banks, secured by oil and gas properties.

DD&A. Refers to depreciation, depletion and amortization of the Company’s property and equipment.

Developed acreage. The number of acres which are allocated or assignable to producing wells or wells capable of production.

Development costs. Capital costs incurred in the acquisition, exploitation and exploration of proved oil and natural gas reserves divided by proved reserve additions and revisions to proved reserves.

Development well. A well drilled into a proved oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.

Dry hole. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.

Exploitation. The continuing development of a known producing formation in a previously discovered field. To make complete or maximize the ultimate recovery of oil or natural gas from the field by work including development wells, secondary recovery equipment or other suitable processes and technology.

Exploration. The search for natural accumulations of oil and natural gas by any geological, geophysical or other suitable means.

Exploratory well. A well drilled to find and produce oil or natural gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir or to extend a known reservoir.

Extensions and discoveries. As to any period, the increases to proved reserves from all sources other than the acquisition of proved properties or revisions of previous estimates.

Field. An area consisting of either a single reservoir or multiple reservoirs, all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

Formation. A layer of rock which has distinct characteristics that differs from nearby rock.

Gross acres or wells. Refers to the total acres or wells in which the Company owns any amount of working interest.



Lease. An instrument which grants to another (the lessee) the exclusive right to enter and explore for, drill for, produce, store and remove oil and natural gas from the mineral interest, in consideration for which the lessor is entitled to certain rents and royalties payable under the terms of the lease. Typically, the duration of the lessee's authorization is for a stated term of years and “for so long thereafter” as minerals are producing.

Mcf. One thousand cubic feet of natural gas at standard atmospheric conditions.

Mcf. One thousand cubic feet equivalent of natural gas, calculated by converting oil to equivalent Mcf at a ratio of 6 Mcf for each Bbl of oil.

MMBtu. One million British thermal units of energy commonly used to measure heat value or energy content of natural gas.

Natural gas liquids ("NGLs"). Liquid hydrocarbons that have been extracted from natural gas, such as ethane, propane, butane and natural gasoline.

Net acres or wells. Refers to gross acres or wells multiplied, in each case, by the percentage interest owned by the Company.

Net production. Oil and gas production that is owned by the Company, less royalties and production due others.

Net revenue interest. An owner’s interest in the revenues of a well after deducting proceeds allocated to royalty and overriding interests.

Oil. Crude oil or condensate.

Operator. The individual or company responsible for the exploration, development and production of an oil or natural gas well or lease.

Overriding royalty interest (“ORRI”). A royalty interest that is created out of the operating or working interest. Its term is coextensive with that of the operating interest from which it was created.

Pay zone. A geological deposit in which oil and natural gas is found in commercial quantities.

Plugging and abandonment. Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface. Regulations of all states require plugging of abandoned wells.

Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed operating and production expenses and taxes.

Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

Proved developed nonproducing reserves ("PDNP"). Reserves that consist of (i) proved reserves from wells which have been completed and tested but are not producing due to lack of market or minor completion problems which are expected to be corrected and (ii) proved reserves currently behind the pipe in existing wells and which are expected to be productive due to both the well log characteristics and analogous production in the immediate vicinity of the wells.

Proved developed producing reserves ("PDP"). Proved reserves that can be expected to be recovered from currently producing zones under the continuation of present operating methods.

Proved developed reserves. The combination of proved developed producing and proved developed nonproducing reserves.



Proved reserves. The estimated quantities of oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.

Proved undeveloped reserves ("PUD"). Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.

PV-10. When used with respect to oil and natural gas reserves, PV-10 means the estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and future development and abandonment costs, using prices and costs in effect at the determination date, before income taxes, and without giving effect to non-property-related expenses except for specific general and administrative expenses incurred to operate the properties, discounted to a present value using an annual discount rate of 10%.

Recompletion. A process of re-entering an existing wellbore that is either producing or not producing and completing new reservoirs in an attempt to establish or increase existing production.

Re-entry. Entering an existing well bore to redrill or repair.

Reservoir. A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.

Royalty. An interest in an oil and natural gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage, or of the proceeds of the sale thereof, but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner's royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.

Shut in. A well suspended from production or injection but not abandoned.

Spacing. The distance between wells producing from the same reservoir. Spacing is often expressed in terms of acres (e.g., 640-acre spacing) and is often established by regulatory agencies.

Standardized measure of discounted future net cash flows. The discounted future net cash flows relating to proved reserves based on prices used in estimating the reserves, year-end costs, and statutory tax rates, and a 10% annual discount rate. The information for this calculation is included in the note regarding disclosures about oil and gas reserve data contained in the Notes to Consolidated Financial Statements included in this Form 10-K.

Undeveloped acreage. Leased acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves.

Unit. The joining of all or substantially all interests in a reservoir or field, rather than a single tract, to provide for development and operation without regard to separate property interests. Also, the area covered by a unitization agreement.

Wellbore. The hole drilled by the bit that is equipped for crude oil or natural gas production on a completed well. Also called well or borehole.

Working interest. An interest in an oil and gas lease that gives the owner of the interest the right to drill for and produce oil and natural gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations. The share of production to which a working interest is entitled will be smaller than the share of costs that the working interest owner is required to bear to the extent of any royalty burden.



## INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm .....F-2
Consolidated Balance Sheets .....F-3
Consolidated Statements of Operations .....F-4
Consolidated Statements of Changes in Stockholders' Equity .....F-5
Consolidated Statements of Cash Flows .....F-6
Notes to Consolidated Financial Statements .....F-7



# Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Mexico Energy Corporation

We have audited the accompanying consolidated balance sheets of Mexico Energy Corporation and Subsidiaries as of March 31, 2013 and 2012 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended March 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mexico Energy Corporation and Subsidiaries as of March 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Oklahoma City, Oklahoma
July 1, 2013



## Mexico Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS

<table><tr><td></td><td>March 31, 2013</td><td>March 31, 2012</td></tr><tr><td>ASSETS</td><td></td><td></td></tr><tr><td>Current assets</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 166,406</td><td>$ 498,681</td></tr><tr><td>Accounts receivable:</td><td></td><td></td></tr><tr><td>Oil and gas sales</td><td>538,971</td><td>333,191</td></tr><tr><td>Trade</td><td>16,370</td><td>30,404</td></tr><tr><td>Prepaid costs and expenses</td><td>19,281</td><td>16,782</td></tr><tr><td>Total current assets</td><td>741,028</td><td>879,058</td></tr><tr><td>Property and equipment, at cost</td><td></td><td></td></tr><tr><td>Oil and gas properties, using the full cost method</td><td>34,309,328</td><td>31,840,059</td></tr><tr><td>Other</td><td>92,326</td><td>78,520</td></tr><tr><td></td><td>34,401,654</td><td>31,918,579</td></tr><tr><td>Less accumulated depreciation, depletion and amortization</td><td>17,323,692</td><td>16,223,267</td></tr><tr><td>Property and equipment, net</td><td>17,077,962</td><td>15,695,312</td></tr><tr><td>Other noncurrent assets</td><td>116,454</td><td>-</td></tr><tr><td></td><td>$ 17,935,444</td><td>$ 16,574,370</td></tr><tr><td>LIABILITIES AND STOCKHOLDERS&#x27; EQUITY</td><td></td><td></td></tr><tr><td>Current liabilities</td><td></td><td></td></tr><tr><td>Accounts payable and accrued expenses</td><td>$ 431,848</td><td>$ 402,098</td></tr><tr><td>Long-term debt</td><td>2,950,000</td><td>1,700,000</td></tr><tr><td>Asset retirement obligations</td><td>763,412</td><td>613,279</td></tr><tr><td>Deferred income tax liabilities</td><td>853,199</td><td>884,703</td></tr><tr><td>Commitments and contingencies</td><td></td><td></td></tr><tr><td>Stockholders&#x27; equity</td><td></td><td></td></tr><tr><td>Preferred stock - $1.00 par value;</td><td></td><td></td></tr><tr><td>10,000,000 shares authorized; none outstanding</td><td>-</td><td>-</td></tr><tr><td>Common stock - $0.50 par value; 40,000,000 shares authorized;</td><td></td><td></td></tr><tr><td>2,102,866 and 2,099,116 shares issued;</td><td></td><td></td></tr><tr><td>2,036,866 and 2,035,949 shares outstanding as of</td><td></td><td></td></tr><tr><td>March 31, 2013 and 2012, respectively</td><td>1,051,433</td><td>1,049,558</td></tr><tr><td>Additional paid-in capital</td><td>6,761,091</td><td>6,608,350</td></tr><tr><td>Retained earnings</td><td>5,465,453</td><td>5,641,827</td></tr><tr><td>Treasury stock, at cost (66,000 and 63,167 shares, respectively)</td><td>(340,992)</td><td>(325,445)</td></tr><tr><td>Total stockholders&#x27; equity</td><td>12,936,985</td><td>12,974,290</td></tr><tr><td></td><td>$ 17,935,444</td><td>$ 16,574,370</td></tr></table>

The accompanying notes to the consolidated financial statements are an integral part of these statements.



## Mexico Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Operating revenues:</td><td></td><td></td><td></td></tr><tr><td>Oil and gas</td><td>$ 3,063,707</td><td>$ 3,223,659</td><td>$ 3,145,247</td></tr><tr><td>Other</td><td>32,708</td><td>16,380</td><td>16,611</td></tr><tr><td>Total operating revenues</td><td>3,096,415</td><td>3,240,039</td><td>3,161,858</td></tr><tr><td>Operating expenses:</td><td></td><td></td><td></td></tr><tr><td>Production</td><td>1,082,043</td><td>926,215</td><td>1,025,932</td></tr><tr><td>Accretion of asset retirement obligation</td><td>39,376</td><td>36,251</td><td>34,129</td></tr><tr><td>Depreciation, depletion and amortization</td><td>1,100,425</td><td>996,205</td><td>1,047,906</td></tr><tr><td>General and administrative</td><td>1,028,846</td><td>950,690</td><td>877,790</td></tr><tr><td>Total operating expenses</td><td>3,250,690</td><td>2,909,361</td><td>2,985,757</td></tr><tr><td>Operating (loss) profit</td><td>(154,275)</td><td>330,678</td><td>176,101</td></tr><tr><td>Other income (expenses):</td><td></td><td></td><td></td></tr><tr><td>Interest income</td><td>229</td><td>195</td><td>360</td></tr><tr><td>Interest expense</td><td>(53,832)</td><td>(28,840)</td><td>(36,361)</td></tr><tr><td>Net other expense</td><td>(53,603)</td><td>(28,645)</td><td>(36,001)</td></tr><tr><td>(Loss) earnings before provision for income taxes</td><td>(207,878)</td><td>302,033</td><td>140,100</td></tr><tr><td>Income tax expense (benefit):</td><td></td><td></td><td></td></tr><tr><td>Current</td><td>-</td><td>-</td><td>(25,502)</td></tr><tr><td>Deferred</td><td>(31,504)</td><td>(27,960)</td><td>9,906</td></tr><tr><td></td><td>(31,504)</td><td>(27,960)</td><td>(15,596)</td></tr><tr><td>Net (loss) income</td><td>$ (176,374)</td><td>$ 329,993</td><td>$ 155,696</td></tr><tr><td>(Loss) income per common share:</td><td></td><td></td><td></td></tr><tr><td>Basic:</td><td>$ (0.09)</td><td>$ 0.16</td><td>$ 0.08</td></tr><tr><td>Diluted:</td><td>$ (0.09)</td><td>$ 0.16</td><td>$ 0.08</td></tr><tr><td>Weighted average common shares outstanding:</td><td></td><td></td><td></td></tr><tr><td>Basic:</td><td>2,036,959</td><td>2,028,014</td><td>1,947,605</td></tr><tr><td>Diluted:</td><td>2,036,959</td><td>2,036,241</td><td>1,962,656</td></tr></table>



## Mexico Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended March 31, 2013, 2012 and 2011

<table><tr><td></td><td>Common Stock Par Value</td><td>Treasury Stock</td><td>Additional Paid-In Capital</td><td>Retained Earnings</td><td>Total Stockholders&#x27; Equity</td></tr><tr><td>Balance at April 1, 2010</td><td>$1,001,933</td><td>$ (426,617)</td><td>$5,907,899</td><td>$ 5,156,138</td><td>$ 11,639,353</td></tr><tr><td>Net income</td><td>-</td><td>-</td><td>-</td><td>155,696</td><td>155,696</td></tr><tr><td>Issuance of stock for properties</td><td>-</td><td>136,277</td><td>28,479</td><td>-</td><td>164,756</td></tr><tr><td>Purchase of stock</td><td>-</td><td>(12,325)</td><td>-</td><td>-</td><td>(12,325)</td></tr><tr><td>Issuance of stock through options exercised</td><td>42,625</td><td>-</td><td>491,000</td><td>-</td><td>533,625</td></tr><tr><td>Excess tax benefits from stock-based compensation</td><td>-</td><td>-</td><td>(25,502)</td><td>-</td><td>(25,502)</td></tr><tr><td>Stock based compensation</td><td>-</td><td>-</td><td>51,350</td><td>-</td><td>51,350</td></tr><tr><td>Balance at March 31, 2011</td><td>$1,044,558</td><td>$ (302,665)</td><td>$6,453,226</td><td>$ 5,311,834</td><td>$ 12,506,953</td></tr><tr><td>Net income</td><td>-</td><td>-</td><td>-</td><td>329,993</td><td>329,993</td></tr><tr><td>Purchase of stock</td><td>-</td><td>(22,780)</td><td>-</td><td>-</td><td>(22,780)</td></tr><tr><td>Issuance of stock through options exercised</td><td>5,000</td><td>-</td><td>35,000</td><td>-</td><td>40,000</td></tr><tr><td>Stock based compensation</td><td>-</td><td>-</td><td>120,124</td><td>-</td><td>120,124</td></tr><tr><td>Balance at March 31, 2012</td><td>$1,049,558</td><td>$ (325,445)</td><td>$6,608,350</td><td>$ 5,641,827</td><td>$ 12,974,290</td></tr><tr><td>Net loss</td><td>-</td><td>-</td><td>-</td><td>(176,374)</td><td>(176,374)</td></tr><tr><td>Purchase of stock</td><td>-</td><td>(15,547)</td><td>-</td><td>-</td><td>(15,547)</td></tr><tr><td>Issuance of stock through options exercised</td><td>1,875</td><td>-</td><td>14,438</td><td>-</td><td>16,313</td></tr><tr><td>Stock based compensation</td><td>-</td><td>-</td><td>138,303</td><td>-</td><td>138,303</td></tr><tr><td>Balance at March 31, 2013</td><td>$1,051,433</td><td>$ (340,992)</td><td>$6,761,091</td><td>$ 5,465,453</td><td>$ 12,936,985</td></tr><tr><td>SHARE ACTIVITY</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td>2013</td><td>2012</td><td>2011</td><td></td><td></td></tr><tr><td>Common stock shares, issued:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>At beginning of year</td><td>2,099,116</td><td>2,089,116</td><td>2,003,866</td><td></td><td></td></tr><tr><td>Issued</td><td>3,750</td><td>10,000</td><td>85,250</td><td></td><td></td></tr><tr><td>At end of year</td><td>2,102,866</td><td>2,099,116</td><td>2,089,116</td><td></td><td></td></tr><tr><td>Common stock shares, held in treasury:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>At beginning of year</td><td>(63,167)</td><td>(59,167)</td><td>(84,000)</td><td></td><td></td></tr><tr><td>Exchange for property</td><td>-</td><td>-</td><td>26,833</td><td></td><td></td></tr><tr><td>Acquisitions</td><td>(2,833)</td><td>(4,000)</td><td>(2,000)</td><td></td><td></td></tr><tr><td>At end of year</td><td>(66,000)</td><td>(63,167)</td><td>(59,167)</td><td></td><td></td></tr><tr><td>Common stock shares, outstanding</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>At end of year</td><td>2,036,866</td><td>2,035,949</td><td>2,029,949</td><td></td><td></td></tr></table>

The accompanying notes to the consolidated financial statements are an integral part of these statements.



## Mexico Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Cash flows from operating activities:</td><td></td><td></td><td></td></tr><tr><td>Net (loss) income</td><td>$ (176,374)</td><td>$ 329,993</td><td>$ 155,696</td></tr><tr><td>Adjustments to reconcile net income to net cash provided by operating activities:</td><td></td><td></td><td></td></tr><tr><td>Deferred income tax (benefit) expense</td><td>(31,504)</td><td>(27,960)</td><td>9,906</td></tr><tr><td>Excess tax benefit from share based payment arrangement</td><td>-</td><td>-</td><td>25,502</td></tr><tr><td>Stock-based compensation</td><td>138,303</td><td>120,124</td><td>51,350</td></tr><tr><td>Depreciation, depletion and amortization</td><td>1,100,425</td><td>996,205</td><td>1,047,906</td></tr><tr><td>Accretion of asset retirement obligations</td><td>39,376</td><td>36,251</td><td>34,129</td></tr><tr><td>Other</td><td>(4,918)</td><td>(2,323)</td><td>(22,526)</td></tr><tr><td>Changes in assets and liabilities, net of business combination:</td><td></td><td></td><td></td></tr><tr><td>(Increase) decrease in accounts receivable</td><td>(117,123)</td><td>63,052</td><td>186,157</td></tr><tr><td>(Increase) decrease in prepaid expenses</td><td>(2,499)</td><td>47,697</td><td>(47,318)</td></tr><tr><td>Increase in noncurrent assets</td><td>(116,454)</td><td>-</td><td>-</td></tr><tr><td>Decrease in income taxes payable</td><td>-</td><td>-</td><td>(25,502)</td></tr><tr><td>(Decrease) increase in accounts payable and accrued expenses</td><td>(17,358)</td><td>10,257</td><td>(79,840)</td></tr><tr><td>Net cash provided by operating activities</td><td>811,874</td><td>1,573,296</td><td>1,335,460</td></tr><tr><td>Cash flows from investing activities:</td><td></td><td></td><td></td></tr><tr><td>Additions to oil and gas properties</td><td>(1,300,151)</td><td>(1,642,449)</td><td>(2,435,374)</td></tr><tr><td>Acquisition of business</td><td>(1,150,000)</td><td>-</td><td>(478,000)</td></tr><tr><td>Additions to other property and equipment</td><td>(13,806)</td><td>-</td><td>(2,359)</td></tr><tr><td>Proceeds from sale of oil and gas properties and equipment</td><td>69,042</td><td>471,543</td><td>3,107</td></tr><tr><td>Net cash used in investing activities</td><td>(2,394,915)</td><td>(1,170,906)</td><td>(2,912,626)</td></tr><tr><td>Cash flows from financing activities:</td><td></td><td></td><td></td></tr><tr><td>Acquisition of treasury stock</td><td>(15,547)</td><td>(22,780)</td><td>(12,325)</td></tr><tr><td>Proceeds from exercise of stock options</td><td>16,313</td><td>40,000</td><td>533,625</td></tr><tr><td>Reduction of long-term debt</td><td>(350,000)</td><td>(1,200,000)</td><td>(1,395,000)</td></tr><tr><td>Proceeds from long-term debt</td><td>1,600,000</td><td>1,100,000</td><td>2,495,000</td></tr><tr><td>Excess tax expense from share based payment arrangement</td><td>-</td><td>-</td><td>(25,502)</td></tr><tr><td>Net cash provided by (used in) financing activities</td><td>1,250,766</td><td>(82,780)</td><td>1,595,798</td></tr><tr><td>Net (decrease) increase in cash and cash equivalents</td><td>(332,275)</td><td>319,610</td><td>18,632</td></tr><tr><td>Cash and cash equivalents at beginning of period</td><td>498,681</td><td>179,071</td><td>160,439</td></tr><tr><td>Cash and cash equivalents at end of period</td><td>$ 166,406</td><td>$ 498,681</td><td>$ 179,071</td></tr><tr><td>Supplemental disclosure of cash flow information:</td><td></td><td></td><td></td></tr><tr><td>Cash paid for interest</td><td>$ 49,158</td><td>$ 27,920</td><td>$ 35,738</td></tr><tr><td>Income taxes paid</td><td>$ -</td><td>$ -</td><td>$ -</td></tr><tr><td>Non-cash investing and financing activities:</td><td></td><td></td><td></td></tr><tr><td>Asset retirement obligations</td><td>$ 114,003</td><td>$ 53,468</td><td>$ 25,043</td></tr><tr><td>Issuance of common stock in exchange for oil and gas properties</td><td>$ -</td><td>$ -</td><td>$ 164,756</td></tr><tr><td>Acquisition of subsidiary resulting in the assumption of liabilities as follows:</td><td></td><td></td><td></td></tr><tr><td>Fair value of assets</td><td>$ 1,276,636</td><td>$ -</td><td>$ 487,868</td></tr><tr><td>Cash paid</td><td>(1,150,000)</td><td>-</td><td>(478,000)</td></tr><tr><td>Liabilities assumed</td><td>$ 126,636</td><td>$ -</td><td>$ 9,868</td></tr></table>

The accompanying notes to the consolidated financial statements are an integral part of these statements.



# MEXCO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 31, 2013, 2012 and 2011

## 1. Nature of Operations

Mexico Energy Corporation (a Colorado corporation) and its wholly owned subsidiaries, Forman Energy Corporation (a New York corporation), Southwest Texas Disposal Corporation (a Texas corporation) and TBO Oil & Gas, LLC (a Texas limited liability company) (collectively, the "Company") are engaged in the exploration, development and production of natural gas, crude oil, condensate and natural gas liquids ("NGLs"). Most of the Company's oil and gas interests are centered in West Texas; however, we own producing properties and undeveloped acreage in twelve states. Although most of our oil and gas interests are operated by others, we operate several properties in which we own an interest.

On December 31, 2012, Mexco Energy Corporation acquired all of the outstanding ownership interests of TBO Oil & Gas, LLC, a Texas limited liability company which owns non-operated working interests in over 280 wells producing primarily oil.

## 2. Summary of Significant Accounting Policies

Principles of Consolidation. The consolidated financial statements include the accounts of Mexco Energy Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions associated with the consolidated operations have been eliminated.

Estimates and Assumptions. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make informed judgments, estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. In addition, significant estimates are used in determining year end proved oil and gas reserves. Although management believes its estimates and assumptions are reasonable, actual results may differ materially from those estimates. The estimate of our oil and natural gas reserves, which is used to compute depreciation, depletion, amortization and impairment of oil and gas properties, is the most significant of the estimates and assumptions that affect these reported results.

Cash and Cash Equivalents. We consider all highly liquid debt instruments purchased with maturities of three months or less and money market funds to be cash equivalents. We maintain our cash in bank deposit accounts that may, at times, exceed federally insured limits. At March 31, 2013, we had the majority of our cash and cash equivalents with one financial institution. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk.

Accounts Receivable. Our accounts receivable include trade receivables from joint interest owners and oil and gas purchasers. Credit is extended based on an evaluation of a customer's financial condition and, generally, is uncollateralized. Accounts receivable under joint operating agreements have a right of offset against future oil and gas revenues if a producing well is completed. The collectability of receivables is assessed and an allowance is made for any doubtful accounts. The allowance for doubtful accounts is determined based on our previous loss history. We have not experienced any significant credit losses. For the years ending March 31, 2013, 2012 and 2011, no allowance has been made for doubtful accounts.

Oil and Gas Properties. Oil and gas properties are accounted for using the full cost method of accounting. Under this method of accounting, the costs of unsuccessful, as well as successful, acquisition, exploration and development activities are capitalized as property and equipment. This includes any internal costs that are directly related to exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. The carrying amount of oil and gas properties also includes estimated asset retirement costs recorded based on the fair value of the asset retirement obligation (“ARO”) when incurred. Generally, no gains or losses are recognized on the sale or disposition of oil and gas properties.

Accounting for Long-Lived Assets. The Company reviews property and equipment for impairment whenever indicators of impairment are present to determine if the carrying amounts exceed the estimated future net cash flows to be realized. Impairment losses are recognized based on the estimated fair value of the asset.



Excluded Costs. Oil and gas properties include costs that are excluded from capitalized costs being amortized. These amounts represent investments in unproved properties and major development projects. These costs are excluded until proved reserves are found or until it is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if impairment has occurred. The amount of any impairment is transferred to the capitalized costs being amortized (the depreciation, depletion and amortization ("DD&A") pool). Impairments transferred to the DD&A pool increase the DD&A rate.

Ceiling Test. Under the full cost method of accounting, a ceiling test is performed each quarter. The full cost ceiling test is an impairment test to determine a limit, or ceiling, on the book value of oil and gas properties. That limit is basically the after tax present value of the future net cash flows from proved crude oil and natural gas reserves, excluding future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet; and, using an average price over the prior 12-month period held flat for the life of production plus the lower of cost or fair market value of unproved properties. If net capitalized costs of crude oil and natural gas properties exceed the ceiling limit, we must charge the amount of the excess to earnings as an expense reflected in additional accumulated DD&A. This is called a "ceiling limitation writedown." This charge does not impact cash flow from operating activities, but does reduce our stockholders' equity and reported earnings.

Depreciation, Depletion and Amortization. The depreciable base for oil and gas properties includes the sum of capitalized costs, net of accumulated DD&A, estimated future development costs and asset retirement costs not accrued in oil and gas properties, less costs excluded from amortization and salvage. The depreciable base of oil and gas properties is amortized using the unit-of-production method.

Asset Retirement Obligations. We have significant obligations to plug and abandon natural gas and crude oil wells and related equipment at the end of oil and gas production operations. We record the fair value of a liability for an ARO in the period in which it is incurred and a corresponding increase in the carrying amount of the related asset. Subsequently, the asset retirement costs included in the carrying amount of the related asset are allocated to expense using the units of production method. In addition, increases in the discounted ARO liability resulting from the passage of time are reflected as accretion expense in the Consolidated Statement of Operations.

Estimating the future ARO requires management to make estimates and judgments regarding timing and existence of a liability, as well as what constitutes adequate restoration. We use the present value of estimated cash flows related to the ARO to determine the fair value. Inherent in the present value calculation are numerous assumptions and judgments including the ultimate costs, inflation factors, credit adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the present value of the existing ARO liability, a corresponding adjustment is made to the related asset.

Income Taxes. The Company recognizes deferred tax assets and liabilities for future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applicable to the years in which those differences are expected to be settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the period that includes the enactment date. Any interest and penalties are recorded as interest expense and general and administrative expense, respectively.

Other Property and Equipment. Provisions for depreciation of office furniture and equipment are computed on the straight-line method based on estimated useful lives of three to ten years.

Income (Loss) Per Common Share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share assumes the exercise of all stock options having exercise prices less than the average market price of the common stock during the period using the treasury stock method and is computed by dividing net income (loss) by the weighted average number of common shares and dilutive potential common shares (stock options) outstanding during the period. In periods where losses are reported, the weighted-average number of common shares outstanding excludes potential common shares, because their inclusion would be anti-dilutive.



Due to a net loss for the year ended March 31, 2013, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. For the year ended March 31, 2012, 40,000 options were excluded from the diluted net income per share calculations because the options are anti-dilutive. Anti-dilutive stock options have a weighted average exercise price of $6.80 at March 31, 2012. For the year ended March 31, 2011, no potential common shares relating to stock options were excluded in the computation of diluted net income per share.

The following is a reconciliation of the number of shares used in the calculation of basic income per share and diluted income per share for the periods ended March 31:

<table><tr><td rowspan="2">Net (loss) income</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>$ (176,374)</td><td>$ 329,993</td><td>$ 155,696</td></tr><tr><td>Shares outstanding:</td><td></td><td></td><td></td></tr><tr><td>Weighted avg. common shares outstanding - basic</td><td>2,036,959</td><td>2,028,014</td><td>1,947,605</td></tr><tr><td>Effect of the assumed exercise of dilutive stock options</td><td>-</td><td>8,227</td><td>15,051</td></tr><tr><td>Weighted avg. common shares outstanding - dilutive</td><td>2,036,959</td><td>2,036,241</td><td>1,962,656</td></tr><tr><td>(Loss) income per common share:</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ (0.09)</td><td>$ 0.16</td><td>$ 0.08</td></tr><tr><td>Diluted</td><td>$ (0.09)</td><td>$ 0.16</td><td>$ 0.08</td></tr></table>

Revenue Recognition. Oil and gas sales and resulting receivables are recognized when the product is delivered to the purchaser and title has transferred. Sales are to credit-worthy energy purchasers with payments generally received within 60 days of transportation from the well site. We have historically had little, if any, uncollectible oil and gas receivables.

Gas Balancing. Gas imbalances are accounted for under the sales method whereby revenues are recognized based on production sold. A liability is recorded when our excess takes of natural gas volumes exceeds our estimated remaining recoverable reserves (over produced). No receivables are recorded for those wells where Mexico has taken less than its ownership share of gas production (under produced). We do not have any significant gas imbalances.

Stock-based Compensation. We use the Binomial option pricing model to estimate the fair value of stock based compensation expenses at grant date. This expense is recognized as compensation expense in our financial statements over the vesting period. We recognize the fair value of stock based compensation awards as wages in the Consolidated Statements of Operations based on a graded-vesting schedule over the vesting period.

Recent Accounting Pronouncements. In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Topic 820: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No. 2011-04 clarifies application of fair value measurements and disclosure requirements and is effective for Mexico as of April 1, 2012. The adoption of ASU 2011-04 did not have a material effect on our consolidated financial statements.

There were various other accounting standards and interpretations issued during our fiscal year, all of which have been determined to be not applicable or significant by management to have a material impact on the Company’s financial position, operations or cash flows.

## 3. Business Combinations

On December 31, 2012, the Company purchased all of the outstanding ownership interests of TBO Oil & Gas, LLC (“TBO”), a Texas limited liability company which owns non-operated working interests in approximately 280 wells producing primarily oil, expanding the Company’s revenues. The cash purchase price of $1,150,000 was funded from our $4.9 million bank credit facility.



The purchase price was allocated to the assets acquired and liabilities assumed at estimated fair values as follows:

<table><tr><td>Proved oil and gas properties</td><td>$ 1,202,013</td></tr><tr><td>Accounts receivable</td><td>74,623</td></tr><tr><td>Total assets acquired</td><td>1,276,636</td></tr><tr><td>Accounts payable</td><td>(45,876)</td></tr><tr><td>Asset retirement obligations assumed</td><td>(80,760)</td></tr><tr><td>Net purchase price</td><td>$ 1,150,000</td></tr></table>

The Company’s results of operations for fiscal year 2013 include approximately $119,800 in revenues and approximately $62,400 in earnings. The Company’s results of operations for fiscal years 2012 and 2011 do not include any revenues or costs from TBO.

The Company has not disclosed the pro forma information for this acquisition because the revenue and expenses for this acquisition are immaterial to our consolidated financial statements.

## 4. Fair Value of Financial Instruments.

Fair value as defined by authoritative literature is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. Fair value measurements are classified and disclosed in one of the following categories:

Level 1 – Quoted prices in active markets for identical assets and liabilities.

Level 2 – Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Significant inputs to the valuation model are unobservable.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. In accordance with the reporting requirements of FASB ASC Topic 825, Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments.

The initial measurement of asset retirement obligations’ fair value is calculated using discounted cash flow techniques and is based on internal estimates of future retirement costs associated with oil and gas properties. Given the unobservable nature of the inputs, including plugging costs and reserve lives, the initial measurement of the ARO liability is deemed to use Level 3 inputs. See the Company’s note on AROs for further discussion. AROs incurred during the year ended March 31, 2013 were approximately $114,000.

The carrying amount reported in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported in the accompanying consolidated balance sheets for long term debt approximates fair value because the actual interest rates do not significantly differ from current rates offered for instruments with similar characteristics.

## 5. Credit Facility

Mexico has a revolving credit agreement with Bank of America, N.A. (the “Agreement”), which provides for a credit facility of $4,900,000 with no monthly commitment reductions and a borrowing base evaluated annually, currently set at $4,900,000. Amounts borrowed under the Agreement are collateralized by the common stock of the Company’s wholly owned subsidiaries and substantially all of the Company’s oil and gas properties. Availability of this line of credit at March 31, 2013 was $1,950,000. No principal payments are anticipated to be required through November 30, 2014.



The Agreement was renewed six times with the sixth amendment on October 22, 2012, which revised the maturity date to November 30, 2014. Under the original and renewed agreements, interest on the facility accrues at an annual rate equal to the British Bankers Association London Interbank Offered Rate ("BBA LIBOR") daily floating rate, plus 2.50 percentage points, which was 2.70% on March 31, 2013. Interest on the outstanding amount under the credit agreement is payable monthly. In addition, we will pay an unused commitment fee in an amount equal to  \( \frac{1}{2} \)  of 1 percent (.5%) times the daily average of the unadvanced amount of the commitment. The unused commitment fee is payable quarterly in arrears on the last day of each calendar quarter.

The Agreement contains customary covenants for credit facilities of this type including limitations on disposition of assets, mergers and reorganizations. We are also obligated to meet certain financial covenants under the Agreement. Mexico is in compliance with all covenants as of March 31, 2013. In addition, this Agreement prohibits us from paying cash dividends on our common stock. The Agreement does grant the Company permission to enter into hedge agreements; however, the Company is under no obligation to do so.

At the end of fiscal 2013, a letter of credit for $50,000, in lieu of a plugging bond with the Texas Railroad Commission covering the properties the Company operates is also outstanding under the facility. This letter of credit renews annually.

The balance outstanding on the line of credit was $2,950,000 as of March 31, 2013 and July 1, 2013.

The following table is a summary of activity on the Bank of America, N.A. line of credit for the year ended March 31, 2013:

<table><tr><td></td><td>Principal</td></tr><tr><td>Balance at April 1, 2012:</td><td>$ 1,700,000</td></tr><tr><td>Borrowings</td><td>1,600,000</td></tr><tr><td>Repayments</td><td>(350,000)</td></tr><tr><td>Balance at March 31, 2013:</td><td>$ 2,950,000</td></tr></table>

## 6. Asset Retirement Obligations

Mexico’s asset retirement obligations relate to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties. The fair value of a liability for an ARO is recorded in the period in which it is incurred, discounted to its present value using the credit adjusted risk-free interest rate, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted each period, and the capitalized cost is depreciated over the useful life of the related asset.

The following table provides a rollforward of the asset retirement obligations for fiscal years ended March 31:

<table><tr><td></td><td>2013</td><td>2012</td></tr><tr><td>Carrying amount of asset retirement obligations as of April 1</td><td>$ 663,279</td><td>$ 578,911</td></tr><tr><td>Liabilities incurred</td><td>114,003</td><td>53,468</td></tr><tr><td>Liabilities settled</td><td>(3,246)</td><td>(5,351)</td></tr><tr><td>Accretion expense</td><td>39,376</td><td>36,251</td></tr><tr><td>Carrying amount of asset retirement obligations as of March 31</td><td>813,412</td><td>663,279</td></tr><tr><td>Less: Current portion</td><td>50,000</td><td>50,000</td></tr><tr><td>Non-Current asset retirement obligation</td><td>$ 763,412</td><td>$ 613,279</td></tr></table>

The ARO is included on the consolidated balance sheets with the current portion being included in the accounts payable and accrued expenses.

## 7. Income Taxes

Mexico and its subsidiaries file a consolidated federal income tax return and various state income tax returns. The amount of income taxes we record requires the interpretation of complex rules and regulations of federal and state taxing jurisdictions. With few exceptions, Mexico is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2010.



Significant components of net deferred tax assets (liabilities) at March 31 are as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Deferred tax assets:</td><td></td><td></td><td></td></tr><tr><td>Percentage depletion carryforwards</td><td>$1,336,630</td><td>$1,336,630</td><td>$1,180,896</td></tr><tr><td>Deferred stock-based compensation</td><td>24,003</td><td>13,844</td><td>2,872</td></tr><tr><td>Asset retirement obligation</td><td>252,158</td><td>205,616</td><td>179,462</td></tr><tr><td>Net operating loss</td><td>503,659</td><td>171,411</td><td>125,848</td></tr><tr><td>Other</td><td>3,237</td><td>3,695</td><td>6,200</td></tr><tr><td></td><td>2,119,687</td><td>1,731,196</td><td>1,495,278</td></tr><tr><td>Deferred tax liabilities:</td><td></td><td></td><td></td></tr><tr><td>Excess financial accounting bases over tax bases of property and equipment</td><td>(2,972,886)</td><td>(2,615,899)</td><td>(2,407,941)</td></tr><tr><td>Net deferred tax liabilities</td><td>(853,199)</td><td>(884,703)</td><td>(912,663)</td></tr></table>

As of March 31, 2013, we have a statutory depletion carryforward of approximately $4,300,000, which does not expire. At March 31, 2013, we had a net operating loss carryforward for regular income tax reporting purposes of approximately $3,800,000, which will begin expiring in 2021. Our ability to use some of our net operating loss carryforwards and certain other tax attributes to reduce current and future U.S. federal taxable income is subject to limitations under the Internal Revenue Code.

For the year ended March 31, 2013, there was a deferred income tax benefit of $31,504. There was no current income tax for the year ended March 31, 2013. For the year ended March 31, 2012, there was a deferred income tax benefit of $27,960. There was no current income tax for the year ended March 31, 2012. For the year ended March 31, 2011, there was a current income tax benefit of $25,502 and a deferred income tax expense of $9,906.

A reconciliation of the provision for income taxes to income taxes computed using the federal statutory rate for years ended March 31 follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Tax expense at federal statutory rate (1)</td><td>$ (70,678)</td><td>$ 102,691</td><td>$ 47,634</td></tr><tr><td>Statutory depletion carryforward</td><td>-</td><td>(155,734)</td><td>(86,221)</td></tr><tr><td>Effect of graduated rates</td><td>3,391</td><td>(16,940)</td><td>(3,074)</td></tr><tr><td>Revision of prior year estimates</td><td>-</td><td>4,314</td><td>44,503</td></tr><tr><td>Permanent differences</td><td>35,783</td><td>30,210</td><td>(17,309)</td></tr><tr><td>Other</td><td>-</td><td>7,499</td><td>(1,129)</td></tr><tr><td>Total income tax benefit</td><td>$ (31,504)</td><td>$ (27,960)</td><td>$ (15,596)</td></tr><tr><td>Effective income tax rate</td><td>(15%)</td><td>(9%)</td><td>(11%)</td></tr></table>

(1) The federal statutory rate was 34% for fiscal years ending March 31, 2013, 2012 and 2011.

For the years ended March 31, 2013, 2012 and 2011, we did not have any uncertain tax positions.

For the years ended March 31, 2013, 2012 and 2011, the amount of unrecognized tax benefits was approximately $677,000, $677,000 and $670,000, respectively. While it is expected the amount of unrecognized tax benefits will change in the next 12 months, we do not expect any change to have a significant impact on our results of operations. The recognition of the total amount of the unrecognized tax benefits of $677,000 would have an impact on the effective tax rate. If these unrecognized tax benefits are disallowed, we will be required to pay additional taxes.



A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Unrecognized tax benefits at beginning of period</td><td>$ 677,000</td><td>$ 670,000</td><td>$ 524,000</td></tr><tr><td>Additions based on tax positions related to the current year</td><td>-</td><td>-</td><td>146,000</td></tr><tr><td>Changes to tax positions of prior years</td><td>-</td><td>7,000</td><td>-</td></tr><tr><td>Settlements</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Expirations</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Unrecognized tax benefits at end of period</td><td>$ 677,000</td><td>$ 677,000</td><td>$ 670,000</td></tr></table>

## 8. Major Customers

Currently, we operate exclusively within the United States and our revenues and operating profit are derived from the oil and gas industry. Oil and gas production is sold to various purchasers and the receivables are unsecured. Historically, we have not experienced significant credit losses on our oil and gas accounts and management is of the opinion that significant credit risk does not exist. Management is of the opinion that the loss of any one purchaser would not have an adverse effect on our ability to sell our oil and gas production.

In fiscal 2013, one customer accounted for 26% of the total oil and gas revenues and 24% of the total oil and gas accounts receivable. In fiscal 2012, one customer accounted for 22% of the total oil and gas revenues and 24% of the total oil and gas accounts receivable. In fiscal 2011, two customers accounted for 28% of the total oil and gas revenues and 25% of the total oil and gas accounts receivable.

## 9. Oil and Gas Costs

The costs related to our oil and gas activities were incurred as follows for the year ended March 31:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Property acquisition costs:</td><td></td><td></td><td></td></tr><tr><td>Proved</td><td>$ 20,542</td><td>$ 368,444</td><td>$ 2,147,892</td></tr><tr><td>Unproved</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Exploration</td><td>15,715</td><td>9,910</td><td>29,292</td></tr><tr><td>Development</td><td>1,265,126</td><td>1,455,993</td><td>394,381</td></tr><tr><td>Capitalized asset retirement obligations</td><td>114,003</td><td>53,468</td><td>25,043</td></tr><tr><td>Total costs incurred for oil and gas properties</td><td>$ 1,415,386</td><td>$ 1,887,815</td><td>$ 2,596,608</td></tr></table>

We had the following aggregate capitalized costs relating to our oil and gas property activities at March 31:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Proved oil and gas properties</td><td>$34,138,841</td><td>$31,669,572</td><td>$30,256,330</td></tr><tr><td>Unproved oil and gas properties:</td><td></td><td></td><td></td></tr><tr><td>subject to amortization</td><td>170,487</td><td>170,487</td><td>170,487</td></tr><tr><td>not subject to amortization</td><td>-</td><td>-</td><td>-</td></tr><tr><td></td><td>34,309,328</td><td>31,840,059</td><td>30,426,817</td></tr><tr><td>Less accumulated DD&amp;A</td><td>17,249,803</td><td>16,154,203</td><td>15,161,524</td></tr><tr><td></td><td>$17,059,525</td><td>$15,685,856</td><td>$15,265,293</td></tr></table>

DD&A amounted to $2.03, $1.94 and $1.87 per mcf of production for the years ended March 31, 2013, 2012 and 2011, respectively.

## 10. Stockholders' Equity

In June 2012, the board of directors authorized the use of up to $250,000 to repurchase shares of our common stock for the treasury account. During fiscal 2013, we repurchased 2,833 shares for the treasury at an aggregate cost of $15,547. During fiscal 2012, we repurchased 4,000 shares for the treasury at an aggregate cost of $22,780. During fiscal 2011, we repurchased 2,000 shares for the treasury at an aggregate cost of $12,325.



## 11. Stock Options

In September 2009, we adopted the 2009 Employee Incentive Stock Plan (“2009 Plan”). The 2009 Plan provides for the award of stock options up to 200,000 shares and includes option awards as well as stock awards. Option awards are granted with the restriction of requiring payment for the shares. Stock awards are granted without restrictions and without payment by the recipient. Neither option awards nor stock awards may exceed 25,000 shares granted to any one individual in any fiscal year. Stock options may be an incentive stock option or a nonqualified stock option. Options to purchase common stock under the plan are granted at the fair market value of the common stock at the date of grant, become exercisable to the extent of 25% of the shares optioned on each of four anniversaries of the date of grant, expire ten years from the date of grant and are subject to forfeiture if employment terminates. The 2009 Plan expires ten years from the date of adoption.

According to our employee stock incentive plan, new shares will be issued upon the exercise of stock options and the Company can repurchase shares exercised under the plan. The plan also provides for the granting of stock awards. No stock awards were granted during fiscal 2013, 2012 and 2011.

We recognized compensation expense of $138,303, $120,124 and $51,350 in general and administrative expense in the Consolidated Statements of Operations for fiscal 2013, 2012 and 2011, respectively. The total cost related to non-vested awards not yet recognized at March 31, 2013 totals $111,644, which is expected to be recognized over a weighted average of 2.1 years.

The fair value of each stock option is estimated on the date of grant using the Binomial valuation model. Expected volatilities are based on historical volatility of the Company’s stock over the contractual term of 120 months and other factors. We use historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. As the Company has never declared dividends, no dividend yield is used in the calculation. Actual value realized, if any, is dependent on the future performance of the Company’s common stock and overall stock market conditions. There is no assurance the value realized by an optionee will be at or near the value estimated by the Binomial model.

During the year ended March 31, 2013, no stock options were granted. During the year ended March 31, 2012, the Compensation Committee of the Board of Directors approved and we issued 40,000 stock options to board members, officers and employees of Mexico exercisable at $6.80 per share. During the year ended March 31, 2011, the Compensation Committee of the Board of Directors approved and we issued 42,500 stock options to board members, officers and employees of Mexico exercisable at prices ranging from $6.06 to $6.29 per share. These options are exercisable at a price not less than the fair market value of the stock at the date of grant, have an exercise period of ten years and generally vest over four years.

Included in the following table is a summary of the grant-date fair value of stock options granted and the related assumptions used in the Binomial models for stock options granted in fiscal 2013, 2012 and 2011. All such amounts represent the weighted average amounts for each period.

<table><tr><td rowspan="2"></td><td colspan="3">For the year ended March 31,</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Grant-date fair value</td><td>-</td><td>$ 5.69</td><td>$ 5.15</td></tr><tr><td>Volatility factor</td><td>-</td><td>85.92%</td><td>82.83%</td></tr><tr><td>Dividend yield</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Risk-free interest rate</td><td>-</td><td>1.49%</td><td>2.07%</td></tr><tr><td>Expected term (in years)</td><td>-</td><td>7.25</td><td>7</td></tr></table>

No forfeiture rate is assumed for stock options granted to directors or employees due to the forfeiture rate history for these types of awards. There were no stock options forfeited or expired during the year ended March 31, 2013 and 2012. During the year ended March 31, 2011, 1,000 vested stock options expired because they were not exercised prior to the end of their ten-year term and 10,000 unvested stock options were forfeited due to the termination of a consulting agreement with a consultant and the resignation of an employee.



For the year ended March 31, 2013, employees and directors exercised options on a total of 3,750 shares at exercise prices of $4.35 per share. We received proceeds of $16,313 from these exercises. The total intrinsic value of the exercised options was $3,138. No tax deduction is recorded when options are awarded. Mexico issued new shares of common stock to settle these option exercises. For the year ended March 31, 2012, employees and directors exercised options on a total of 10,000 shares at exercise prices of $4.00 per share. We received proceeds of $40,000 from these exercises. The total intrinsic value of the exercised options was $38,600. For the year ended March 31, 2011, stock options covering 85,250 shares were exercised with 29,950 of these exercised options resulted in a disqualifying disposition. We received proceeds of $533,625 from these option exercises for the year ended March 31, 2011.

The following table is a summary of activity of stock options for the year ended March 31, 2013, 2012 and 2011:

<table><tr><td></td><td>Number of Shares</td><td>Weighted Average Exercise Price Per Share</td><td>Weighted Aggregate Average Remaining Contract Life in Years</td><td>Intrinsic Value</td></tr><tr><td>Outstanding at April 1, 2010</td><td>107,500</td><td>$ 5.94</td><td>2.51</td><td>$ 237,088</td></tr><tr><td>Granted</td><td>42,500</td><td>6.24</td><td></td><td></td></tr><tr><td>Exercised</td><td>(85,250)</td><td>6.26</td><td></td><td></td></tr><tr><td>Forfeited or Expired</td><td>(11,000)</td><td>5.89</td><td></td><td></td></tr><tr><td>Outstanding at March 31, 2011</td><td>53,750</td><td>$ 5.69</td><td>7.33</td><td>$ 401,200</td></tr><tr><td>Granted</td><td>40,000</td><td>6.80</td><td></td><td></td></tr><tr><td>Exercised</td><td>(10,000)</td><td>4.00</td><td></td><td></td></tr><tr><td>Forfeited or Expired</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Outstanding at March 31, 2012</td><td>83,750</td><td>$ 6.42</td><td>8.65</td><td>$ 127,363</td></tr><tr><td>Granted</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Exercised</td><td>(3,750)</td><td>4.35</td><td></td><td></td></tr><tr><td>Forfeited or Expired</td><td>-</td><td>-</td><td></td><td></td></tr><tr><td>Outstanding at March 31, 2013</td><td>80,000</td><td>$ 6.52</td><td>8.03</td><td>$ -</td></tr><tr><td>Vested at March 31, 2013</td><td>30,000</td><td>$ 6.42</td><td>7.82</td><td>$ -</td></tr><tr><td>Exercisable at March 31, 2013</td><td>30,000</td><td>$ 6.42</td><td>7.82</td><td>$ -</td></tr></table>

Other information pertaining to option activity was as follows during the year ended March 31:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Weighted average grant-date fair value of stock options granted (per share)</td><td>$ -</td><td>$ 5.69</td><td>$ 5.15</td></tr><tr><td>Total fair value of options vested</td><td>$ 160,125</td><td>$ 59,875</td><td>$ 37,200</td></tr><tr><td>Total intrinsic value of options exercised</td><td>$ 3,138</td><td>$ 38,600</td><td>$ 533,831</td></tr></table>

The following table summarizes information about options outstanding at March 31, 2013:

<table><tr><td></td><td>Number of Options</td><td>Weighted Average Exercise Price Per Share</td><td>Weighted Average Remaining Contract Life in Years</td><td>Aggregate Intrinsic Value</td></tr><tr><td>Range of Exercise Prices</td><td>40,000</td><td>6.23</td><td></td><td></td></tr><tr><td>6.30 - 6.80</td><td>40,000</td><td>6.80</td><td></td><td></td></tr><tr><td>$ 6.00 - 6.29</td><td>80,000</td><td>$ 6.52</td><td>8.03</td><td>$ -</td></tr></table>

Outstanding options at March 31, 2013 expire between August 2020 and November 2021 and have exercise prices ranging from $6.06 to $6.80.



## 12. Related Party Transactions

Related party transactions for the fiscal year ended March 31, 2013 relate to shared office expenditures in addition to administrative and operating expenses paid on behalf of the majority stockholder. The total billed to and reimbursed by the stockholder for the years ended March 31, 2013, 2012 and 2011 were $144,404, $123,932 and $137,652, respectively.

## 13. Oil and Gas Reserve Data (Unaudited)

The estimates of our proved oil and gas reserves, which are located entirely within the United States, were prepared in accordance with the guidelines established by the SEC. The estimates as of March 31, 2013, 2012, and 2011 are based on evaluations prepared by Joe C. Neal and Associates, Petroleum Consultants. Management emphasizes that reserve estimates are inherently imprecise and are expected to change as new information becomes available and as economic conditions in the industry change.

Proved reserves are estimated quantities of oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.

## Changes in Proved Reserves:

<table><tr><td></td><td>Oil (Bbls)</td><td>Natural Gas (Mcf)</td></tr><tr><td>Proved Developed and Undeveloped Reserves:</td><td></td><td></td></tr><tr><td>As of April 1, 2010</td><td>240,000</td><td>8,405,000</td></tr><tr><td>Revision of previous estimates</td><td>22,000</td><td>130,000</td></tr><tr><td>Purchase of minerals in place</td><td>45,000</td><td>545,000</td></tr><tr><td>Extensions and discoveries</td><td>-</td><td>136,000</td></tr><tr><td>Sales of minerals in place</td><td>-</td><td>-</td></tr><tr><td>Production</td><td>(17,000)</td><td>(459,000)</td></tr><tr><td>As of March 31, 2011</td><td>290,000</td><td>8,757,000</td></tr><tr><td>Revision of previous estimates</td><td>33,000</td><td>(183,000)</td></tr><tr><td>Purchase of minerals in place</td><td>19,000</td><td>-</td></tr><tr><td>Extensions and discoveries</td><td>23,000</td><td>267,000</td></tr><tr><td>Sales of minerals in place</td><td>-</td><td>-</td></tr><tr><td>Production</td><td>(19,000)</td><td>(396,000)</td></tr><tr><td>As of March 31, 2012</td><td>346,000</td><td>8,445,000</td></tr><tr><td>Revision of previous estimates</td><td>(10,000)</td><td>(589,000)</td></tr><tr><td>Purchase of minerals in place</td><td>48,000</td><td>71,000</td></tr><tr><td>Extensions and discoveries</td><td>5,000</td><td>318,000</td></tr><tr><td>Sales of minerals in place</td><td>-</td><td>-</td></tr><tr><td>Production</td><td>(23,000)</td><td>(401,000)</td></tr><tr><td>As of March 31, 2013</td><td>366,000</td><td>7,844,000</td></tr></table>

Proved developed reserves are those expected to be recovered through existing wells, equipment and operating methods. Proved undeveloped reserves ("PUD") are proved reserves are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.



## Summary of Proved Developed and Undeveloped Reserves as of March 31, 2013, 2012 and 2011:

<table><tr><td></td><td>Oil (BbIs)</td><td>Natural Gas (Mcf)</td></tr><tr><td>Proved Developed Reserves:</td><td></td><td></td></tr><tr><td>As of April 1, 2010</td><td>141,980</td><td>5,017,342</td></tr><tr><td>As of March 31, 2011</td><td>159,975</td><td>4,964,061</td></tr><tr><td>As of March 31, 2012</td><td>194,620</td><td>5,359,670</td></tr><tr><td>As of March 31, 2013</td><td>237,420</td><td>4,807,020</td></tr><tr><td>Proved Undeveloped Reserves:</td><td></td><td></td></tr><tr><td>As of April 1, 2010</td><td>98,088</td><td>3,388,248</td></tr><tr><td>As of March 31, 2011</td><td>130,187</td><td>3,792,974</td></tr><tr><td>As of March 31, 2012</td><td>151,730</td><td>3,085,060</td></tr><tr><td>As of March 31, 2013</td><td>128,290</td><td>3,037,180</td></tr></table>

As of March 31, 2013, 2012 and 2011 reserves were computed using the 12-month unweighted average of the first-day-of-the-month prices, in accordance with revised guidelines of the SEC applicable to reserves estimates as of year-end 2010.

At March 31, 2013, we reported estimated PUDs of 3.8 bcfe, which accounted for 38% of our total estimated proved oil and gas reserves. This figure primarily consists of a projected 33 new wells (2.6 bcfe), 4 of which we operate, and 1 new zone behind pipe from a currently producing wellbore (.4 bcfe) that we also operate. Our timetable for this well is totally dependent on the life of the currently producing zone. After the current zone has depleted, we will open the new productive zone. Of the 4 wells we operate (1.9 bcfe), all 4 have additional productive zones behind pipe (.6 bcfe). Also, there is potential to commingle the new zones in the new wells with prior permission from the Railroad Commission. We drilled 1 operated well during fiscal 2012 and completed the well in fiscal 2013. We project 1 operated well will be drilled in fiscal 2014, with the three (3) remaining wells in fiscal 2015. Regarding the remaining 29 PUD locations operated by others (.8 bcfe), three (3) wells are currently being drilled and three (3) locations are currently being prepared to drill with plans for eleven (11) wells to follow in 2014, nine (9) wells in 2015 and three (3) wells in 2016.

Included in proved undeveloped reserves at March 31, 2013 are approximately 1.5 bcfe of reserves which have remained undeveloped for more than five years. These primarily consist of two drilling locations in an area where we have long-standing operations and these locations are currently held by production from other wells in which Mexico owns. As of March 31, 2011, these reserves consisted of three drilling locations projected to be drilled one per year during the fiscal years of 2012, 2013 and 2014. We drilled 1 of these wells during fiscal 2012 and during fiscal 2013, completed the well and turned it on for production. Our timetable for the two remaining wells is to drill one during fiscal 2014 and one during fiscal 2015.

The following table discloses our progress toward the conversion of PUDs during fiscal 2013.

## Progress of Converting Proved Undeveloped Reserves:

<table><tr><td></td><td>Oil &amp; Natural Gas (Mcfe)</td><td>Future Development Costs</td></tr><tr><td>PUDs, beginning of year</td><td>3,995,462</td><td>$ 4,307,550</td></tr><tr><td>Revision of previous estimates</td><td>(412,155)</td><td>(185,185)</td></tr><tr><td>Conversions to PD reserves</td><td>(155,700)</td><td>(228,198)</td></tr><tr><td>Additional PUDs added</td><td>379,334</td><td>647,350</td></tr><tr><td>PUDs, end of year</td><td>3,806,941</td><td>$ 4,541,517</td></tr></table>

Estimated future net cash flows represent an estimate of future net revenues from the production of proved reserves using average prices for 2013, 2012 and 2011 along with estimates of the operating costs, production taxes and future development and abandonment costs (less salvage value) necessary to produce such reserves. No deduction has been made for depreciation, depletion or any indirect costs such as general corporate overhead or interest expense.



Operating costs and production taxes are estimated based on current costs with respect to producing oil and natural gas properties. Future development costs including abandonment costs are based on the best estimate of such costs assuming current economic and operating conditions. The future cash flows estimated to be spent to develop our share of proved undeveloped properties through March 31, 2018 are $4,541,517.

Income tax expense is computed based on applying the appropriate statutory tax rate to the excess of future cash inflows less future production and development costs over the current tax basis of the properties involved, less applicable carryforwards.

The future net revenue information assumes no escalation of costs or prices, except for oil and natural gas sales made under terms of contracts which include fixed and determinable escalation. Future costs and prices could significantly vary from current amounts and, accordingly, revisions in the future could be significant.

The current reporting rules require that year end reserve calculations and future cash inflows be based on the 12-month average market prices for sales of oil and gas on the first calendar day of each month during the fiscal year discounted at 10% per year and assuming continuation of existing economic conditions. The average prices used for fiscal 2013 were $85.53 per bbl of oil and $2.76 per mcf of natural gas. The average prices used for fiscal 2012 were $93.75 per bbl of oil and $3.83 per mcf of natural gas. The average prices used for fiscal 2011 were $77.27 per bbl of oil and $3.88 per mcf of natural gas.

The standardized measure of discounted future net cash flows were computed by applying 12-month average prices for oil and gas (with consideration of price changes only to the extent provided by contractual arrangements in existence at year end) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on year end costs) to be incurred in developing and producing the proved reserves, less estimated future income tax expenses (based on the year end statutory tax rates with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less tax basis of the properties and available credits and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10%.

The basis for this table is the reserve studies prepared by an independent petroleum engineering consultant, which contain imprecise estimates of quantities and rates of production of reserves. Revisions of previous year estimates can have a significant impact on these results. Also, exploration costs in one year may lead to significant discoveries in later years and may significantly change previous estimates of proved reserves and their valuation. Therefore, the standardized measure of discounted future net cash flow is not necessarily indicative of the fair value of our proved oil and gas properties.

The standardized measure of discounted future cash flows at March 31, 2013, 2012 and 2011, which represents the present value of estimated future cash flows using a discount rate of 10% a year, follows:

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Reserves:

<table><tr><td rowspan="2"></td><td colspan="3">March 31</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Future cash inflows</td><td>$ 52,900,000</td><td>$ 64,783,000</td><td>$ 56,413,000</td></tr><tr><td>Future production costs and taxes</td><td>(14,893,000)</td><td>(16,031,000)</td><td>(11,086,000)</td></tr><tr><td>Future development costs</td><td>(4,850,000)</td><td>(4,530,000)</td><td>(4,029,000)</td></tr><tr><td>Future income taxes</td><td>(6,374,000)</td><td>(9,920,000)</td><td>(9,118,000)</td></tr><tr><td>Future net cash flows</td><td>26,783,000</td><td>34,302,000</td><td>32,180,000</td></tr><tr><td>Annual 10% discount for estimated timing of cash flows</td><td>(12,414,000)</td><td>(14,946,000)</td><td>(14,528,000)</td></tr><tr><td>Standardized measure of discounted future net cash flows</td><td>$ 14,369,000</td><td>$ 19,356,000</td><td>$ 17,652,000</td></tr></table>



## Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves:

<table><tr><td rowspan="2"></td><td colspan="3">March 31</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Sales of oil and gas produced, net of production costs</td><td>$ (1,982,000)</td><td>$ (2,298,000)</td><td>$ (2,119,000)</td></tr><tr><td>Net changes in price and production costs</td><td>(5,881,000)</td><td>(375,000)</td><td>1,590,000</td></tr><tr><td>Changes in previously estimated development costs</td><td>1,150,000</td><td>1,353,000</td><td>830,000</td></tr><tr><td>Revisions of quantity estimates</td><td>(811,000)</td><td>1,344,000</td><td>1,088,000</td></tr><tr><td>Net change due to purchases and sales of minerals in place</td><td>1,471,000</td><td>390,000</td><td>1,976,000</td></tr><tr><td>Extensions and discoveries, less related costs</td><td>321,000</td><td>1,449,000</td><td>165,000</td></tr><tr><td>Net change in income taxes</td><td>2,178,000</td><td>(596,000)</td><td>(1,076,000)</td></tr><tr><td>Accretion of discount</td><td>2,495,000</td><td>2,265,000</td><td>1,809,000</td></tr><tr><td>Changes in timing of estimated cash flows and other</td><td>(3,928,000)</td><td>(1,828,000)</td><td>(771,000)</td></tr><tr><td>Changes in standardized measure</td><td>(4,987,000)</td><td>1,704,000</td><td>3,492,000</td></tr><tr><td>Standardized measure, beginning of year</td><td>19,356,000</td><td>17,652,000</td><td>14,160,000</td></tr><tr><td>Standardized measure, end of year</td><td>$ 14,369,000</td><td>$ 19,356,000</td><td>$ 17,652,000</td></tr></table>

## 14. Selected Quarterly Financial Data (Unaudited)

<table><tr><td rowspan="2"></td><td colspan="4">FISCAL 2013</td></tr><tr><td>4th QTR</td><td>3rd QTR</td><td>2nd QTR</td><td>1st QTR</td></tr><tr><td>Oil and gas revenue</td><td>$ 924,098</td><td>$ 781,426</td><td>$ 734,313</td><td>$623,870</td></tr><tr><td>Operating profit (loss)</td><td>63,270</td><td>(78,469)</td><td>(17,004)</td><td>(122,072)</td></tr><tr><td>Net (loss) income</td><td>(74,340)</td><td>(39,580)</td><td>763</td><td>(63,217)</td></tr><tr><td>Net income per share - basic</td><td>(0.04)</td><td>(0.02)</td><td>0.00</td><td>(0.03)</td></tr><tr><td>Net income per share - diluted</td><td>(0.04)</td><td>(0.02)</td><td>0.00</td><td>(0.03)</td></tr><tr><td></td><td colspan="4">FISCAL 2012</td></tr><tr><td></td><td>4th QTR</td><td>3rd QTR</td><td>2nd QTR</td><td>1st QTR</td></tr><tr><td>Oil and gas revenue</td><td>$ 753,875</td><td>$ 753,789</td><td>$ 810,655</td><td>$905,340</td></tr><tr><td>Operating profit (loss)</td><td>(1,305)</td><td>63,837</td><td>111,466</td><td>156,680</td></tr><tr><td>Net income (loss)</td><td>95,375</td><td>50,961</td><td>79,272</td><td>104,385</td></tr><tr><td>Net income (loss) per share - basic</td><td>0.04</td><td>0.03</td><td>0.04</td><td>0.05</td></tr><tr><td>Net income (loss) per share - diluted</td><td>0.04</td><td>0.03</td><td>0.04</td><td>0.05</td></tr></table>



## INDEX TO EXHIBITS

Exhibit Number
3.1* Articles of Incorporation
3.2*** Amended Bylaws as amended on September 13, 2011
10.1** Stock Option Plan
10.2* Bank Line of Credit
10.4**** 2009 Employee Incentive Stock Plan
14.1***** Code of Business Conduct and Ethics
21.1 Subsidiaries of the Company
23.1 Consent of Independent Registered Public Accounting Firm
23.2 Consent of Independent Petroleum Engineers
31.1 Certification of the Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of
32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 Report of Joe C. Neal & Associates, Independent Petroleum Engineer



## SUBSIDIARIES OF MEXCO ENERGY CORPORATION

1. Forman Energy Corporation, a New York corporation

2. Southwest Texas Disposal Corporation, a Texas corporation

3. TBO Oil & Gas, LLC, a Texas limited liability company



## CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated July 1, 2013, with respect to the consolidated financial statements included in the Annual Report of Mexico Energy Corporation on Form 10-K for the year ended March 31, 2013. We hereby consent to the incorporation by reference of said report in the Registration Statements of Mexico Energy Corporation on Form S-8 (File No. 333-131835) and on Form S-8 (File No. 333-165296).

/s/ GRANT THORNTON LLP

Oklahoma City, Oklahoma

July 1, 2013



## CONSENT OF INDEPENDENT PETROLEUM ENGINEERS

As independent engineering consultants, Joe C. Neal & Associates, hereby consents to the use of the name Joe C. Neal & Associates and references to Joe C. Neal & Associates and to the inclusion of and references to our report, or information contained therein, entitled “Evaluation of Oil and Gas Reserves, Mexico Energy Corporation Annual Report Effective Date: March 31, 2013” prepared for Mexico Energy Corporation in the Annual Report on Form 10-K of Mexico Energy Corporation for the filing dated on or about July 1, 2013.

/s/ Joe C. Neal & Associates
JOE C. NEAL & ASSOCIATES,
PETROLEUM AND ENVIRONMENTAL ENGINEERING CONSULTANTS

Midland, Texas

July 1, 2013



# CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Nicholas C. Taylor, certify that:

1. I have reviewed this annual report on Form 10-K of Mexco Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

July 1, 2013

/s/ Nicholas C. Taylor
Nicholas C. Taylor
Chief Executive Officer



# CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Tamala L. McComic, certify that:

1. I have reviewed this annual report on Form 10-K of Mexico Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

July 1, 2013

/s/ Tamala L. McComic

Tamala L. McComic

Chief Financial Officer, President, Treasurer, and

Assistant Secretary



# CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Mexico Energy Corporation (the “Company”) on Form 10-K for the year ending March 31, 2013, as filed with the SEC on the date hereof (the “Report”), we, Nicholas C. Taylor, Chief Executive Officer and Tamala L. McComic, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: July 1, 2013

Dated: July 1, 2013

/s/ Nicholas C. Taylor

Chairman of the Board and Chief Executive Officer

/s/ Tamala L. McComic

Chief Financial Officer, President, Treasurer and Assistant Secretary



# JOE C. NEAL & ASSOCIATES
PETROLEUM ENGINEERING CONSULTANTS
214 W. Texas Ave. Suite 600
Midland, Texas 79701
432-683-4371 FAX: 432-683-9379
E-Mail: info@joecneal.com

June 18, 2013

Mexico Energy Corporation
Tammy McComic, President
214 West Texas Avenue, Suite 1101
Midland, Texas 79701

Re: Evaluation of Oil and Gas Reserves of Mexico Energy Corporation effective March 31, 2013

Mrs. McComic,

In accordance with your request, we have estimated the extent and value of domestic proved crude oil, condensate and gas reserves owned by Mexico Energy Corporation as of March 31, 2013. The properties to which proved reserves are attributable are located in the states of Louisiana, Montana, New Mexico, North Dakota, Oklahoma and Texas with the majority of the value in Texas. The estimated reserves are based on a detailed study of properties owned by Mexico Energy Corporation. During this study, we consulted freely with the officers and employees of Mexico Energy Corporation and were given access to such records, geological and engineering reports, and other data as were desired for examination. In preparation of this report, we have relied, without independent verification, upon information furnished by Mexico Energy Corporation with respect to property interest owned by it, production from such properties, current costs of operation, current prices for production agreements relating to current and future operation and various other information and data which were accepted as represented. The results of our third party study, completed on June 1, 2013, are presented herein. The properties reviewed by Joe C. Neal & Associates represent 98% of the total net proved reserves of Mexico Energy Corporation.

The summary below includes Mexico Energy Corporation, Forman Energy Corporation, Southwest Texas Disposal Corporation and TBO Oil & Gas, LLC which are wholly owned subsidiaries of Mexico Energy Corporation. Six (6) Minor Net Income Streams have been evaluated in this report by projecting an oil and gas stream and applying an oil and gas price. The Mexico Energy Corporation Royalty Income Stream has been limited to twenty five (25) years lifetime. The Mexico Energy Corporation Minor and Royalty Income Streams were declined at ten percent (10%) per year. The Foreman Income Stream was declined at the rate of eight percent (8%) annually for a period of eleven point eight (11.8) years. Seven (7) joint ventures have been projected as income streams because it was not economical to project all the properties on an individual basis. The seven other minor income properties have also been projected as income streams. Income streams have been converted to barrels of oil and MCF'S of gas based on their ratio of income. Where multiple gas wells with small interest exist, production has been summarized to reduce the cost of the evaluation. It was not considered necessary to make a field examination of the physical condition and operation of the properties in which Mexico Energy Corporation owns an interest.



We estimate the Net Proved Reserves, Future Net Revenue, and the Present Value of Future Net Revenue from the properties of Mexico Energy Corporation as of March 31, 2013 to be as follows:

<table><tr><td>Classification of Reserves</td><td>Oil and Condensate (MBBL)</td><td>Gas (MMCF)</td><td>Future Net Revenue (M\()</td><td>Present Value Discounted at 10 % (M\))</td></tr><tr><td>Proved Developed:</td><td></td><td></td><td></td><td></td></tr><tr><td>Producing</td><td>233</td><td>3,728</td><td>20,145</td><td>11,035</td></tr><tr><td>Non-Producing</td><td>5</td><td>1,079</td><td>2,424</td><td>1,554</td></tr><tr><td></td><td>238</td><td>4,807</td><td>22,569</td><td>12,589</td></tr><tr><td>Proved Undeveloped</td><td>128</td><td>3,037</td><td>10,588</td><td>5,199</td></tr><tr><td>Total Proved</td><td>366</td><td>7,844</td><td>33,157</td><td>17,788</td></tr></table>

The following table sets forth the changes in total Proved Reserves owned by Mexico Energy Corporation as of March 31, 2013.

<table><tr><td></td><td>Net Liquid (MBBL)</td><td>Net Gas (MMCF)</td></tr><tr><td>Total Proved Reserves Developed and Undeveloped:</td><td></td><td></td></tr><tr><td>Beginning of Period March 31, 2012</td><td>625</td><td>8,566</td></tr><tr><td>Revisions of Previous Estimates</td><td>(288)</td><td>(696)</td></tr><tr><td>Beginning of Period as Revised</td><td>337</td><td>7,870</td></tr><tr><td>Additions from Drilling and Purchase</td><td>49</td><td>289</td></tr><tr><td>Extensions</td><td>3</td><td>86</td></tr><tr><td>Sales of Minerals-in-Place</td><td>0</td><td>0</td></tr><tr><td>Production</td><td>(23)</td><td>(401)</td></tr><tr><td>End of Period March 31, 2013</td><td>366</td><td>7,844</td></tr><tr><td>Proved Developed Reserves:</td><td></td><td></td></tr><tr><td>Beginning of Period March 31, 2012</td><td>195</td><td>5,360</td></tr><tr><td>End of Period March 31, 2013</td><td>238</td><td>4,807</td></tr></table>

The proved reserves included herein conform to the definition as set forth in the Securities and Exchange Commission’s (“SEC”) Regulations Part 210.4-10(a). An abridged version of the SEC reserves definitions from 210.4-10(a) entitled “Definitions of Oil and Gas Reserves” is included as an attachment to this report. Reserves for the producing properties were determined by extrapolation of the production decline trends, where applicable, analogy with similar offset wells, by volumetric calculations using basic reservoir parameters such as porosity, water saturation, net pay thickness, and estimated areal extent of the reservoir, or by material balance calculations. Reserves for the Proved Developed Non-Producing and Proved Undeveloped properties were determined by volumetric calculations and/or by analogy with offset wells.

Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward. Moreover, estimates of reserves may increase or decrease as a result of future operations, effects of regulation by governmental agencies or geopolitical risks. As a result, the estimates of oil and gas reserves have an intrinsic uncertainty. The reserves included in this report are therefore estimates only and should not be construed as being exact quantities. They may or may not be actually recovered, and if recovered, the revenues therefrom and the actual costs related thereto could be more or less than the estimated amounts.

The estimates of reserves presented herein were based upon a detailed study of the properties in which Mexico owns an interest; however, we have not made any field examination of the properties. No consideration was given in this report to potential environmental liabilities that may exist nor were any costs included for potential liability to restore and clean up damages, if any, caused by past operating practices.



Where wells did not have significant income to Mexico during 2013, wells have been combined into an income stream in their respective Joint Venture and evaluated as a single projection. This eliminated a significant amount of paper in the Report without detracting from the accuracy of the numbers.

Mexico purchased TBO Oil & Gas, LLC in 2013 which included small working interests in approximately 287 properties in Texas, New Mexico and North Dakota.

Mexico Energy Corporation joined the Dodd Federal Unit in Eddy County, New Mexico in 2004. This unit became effective January 1, 2005. COG Operating, LLC is the operator of this unit. This should enhance Mexico's position in Eddy County, New Mexico. COG Operating, LLC added twenty-six (26) wells in the unit area in 2012 and they plan to add another forty-five (45) wells in the future.

Mexico Energy Corporation purchased an interest in the Limpia (San Andres) Lease in the Fuhrman Mascho Field, Andrews County, Texas in February 2011. There were 3 marginal oil producers. There are currently nine (9) wells producing on the Limpia (S.A.) Lease. There are seven (7) wells yet to be drilled. Well numbers 15 and 16 have been drilled during 2013 and additional wells are scheduled to be drilled on the acreage in the future. The new wells were producing at the rate of approximately 60 barrels of oil per day at the last report. Mexico Energy Corporation has approximately a sixteen point two percent (16.2%) working interest in the Limpia Lease.

To estimate economically recoverable oil and gas reserves and related future net cash flows, we consider many factors and assumptions including, but not limited to, the use of reservoir parameters derived from geological, geophysical and engineering data which cannot be measured directly, economic criteria based on current costs and SEC pricing requirements, and forecasts of future production rates. Under the SEC regulations 210.4-10(a)(22)(v) and (26), proved reserves must be demonstrated to be economically producible based on existing economic conditions including the prices and costs at which economic producibility from a reservoir is to be determined as of the effective date of the report. Mexico has informed us that they have furnished us all of the accounts, records, geological and engineering data, and reports and other data required for this investigation. In preparing our forecast of future production and income, we have relied upon data furnished by Mexico with respect to property interests owned, production and well tests from examined wells, normal direct costs of operating the wells or leases, other costs such as transportation and/or processing fees, ad valorem and production taxes, recompletion and development costs, abandonment costs after salvage, product prices based on the SEC regulations, geological structural and isochore maps, well logs, core analyses, and pressure measurements. Joe C. Neal & Associates reviewed such factual data for its reasonableness; however, we have not conducted an independent verification of the data supplied by Mexico.

The value estimated in this report is based on the assumptions that the properties are not negatively affected by the existence of hazardous substances or detrimental environmental conditions. We are experts in the identification of hazardous substances or detrimental environmental conditions, but have not been asked to perform an environmental study. It is possible that tests and inspections conducted by a qualified hazardous substance and environmental expert could reveal the existence of hazardous material and environmental conditions on or around the properties that would negatively affect the properties' value.

Property identification, expense and revenue interests, actual product prices, and operating expenses were provided by Mexico Energy Corporation. This data was not verified by inspection of internal records and files, nor was a physical inspection made of the properties. Information regarding prices and the particular pricing categories under current governmental regulations was supplied by Mexico Energy Corporation.



Net oil and gas reserves are estimated quantities of crude oil, natural gas, and natural gas liquids attributed to the revenue interests of Mexico Energy Corporation. Net income to the interests of Mexico Energy Corporation is the future net revenue after deduction of state and county taxes, operating expenses, and investments, if applicable. The resulting net income is before federal income tax and does not consider any encumbrances against the properties, if such exist. Minor variations in composite columns totals result from computer rounding. Values of the estimated net proved reserves are expressed in terms of future net revenue and present value of future net revenue. Future net revenues are calculated by deducting estimated operating expenses, capital costs, and severance and ad Valorem taxes from the future gross revenue.

Present value of future net revenue is calculated by discounting the future net revenue at the rate of ten percent (10%) per annum compounded monthly over the expected period of realization. The present value set forth in this report does not necessarily represent the fair market value of the evaluated interests.

A summary projection of the estimated future net revenue and present value of future net revenue as of March 31, 2013 is as follows:

<table><tr><td rowspan="2"></td><td colspan="2">Proved Developed Future</td></tr><tr><td>Net Revenue</td><td>Discounted at 10%</td></tr><tr><td>Year</td><td>$</td><td>$</td></tr><tr><td>2014</td><td>2,254,140</td><td>2,162,060</td></tr><tr><td>2015</td><td>2,509,110</td><td>2,231,220</td></tr><tr><td>2016</td><td>2,150,850</td><td>1,697,450</td></tr><tr><td>Remaining</td><td>15,654,310</td><td>6,498,580</td></tr><tr><td></td><td>22,568,410</td><td>12,589,310</td></tr></table>

The future net revenue set forth above reflects estimated capital expenditures in the amount of $308,930.00 necessary to develop those reserves classified as Proved Developed Producing and Proved Developed Non-Producing. Proved Undeveloped net revenue reflects estimated capital costs of $4,541,520.00 to drill and complete those wells and install water floods.

Estimated reserves and future net income amounts presented in this report, as of March 31, 2013, are related to hydrocarbon prices. The hydrocarbon prices used in the preparation of this report are based on the average prices during the twelve (12) month period prior to the ending date of the period covered in this report (determined as unweighted arithmetic averages of the prices in effect on the first-day-of-the-month for each month within such period, unless prices were defined by contractual arrangements as required by the SEC regulations). The benchmark price of $89.17 per barrel has been adjusted by lease for gravity, transportation fees and regional price differentials to an average of $85.53. Gas prices per thousand cubic feet (MCF) are based on a benchmark price of $2.95 per MCF and have been adjusted by lease for BTU content, transportation fees and regional price differentials to an average of $2.76. The oil and gas prices were held constant for the economic life of the properties as specified by the SEC. Oil volumes shown herein are expressed in barrels, which are equivalent to forty-two (42) United States gallons. Gas volumes are expressed at standard conditions of sixty degrees (60°) Fahrenheit and at the standard pressure base of the respective area in which the reserves are located.

Operating expenses including direct and indirect overhead expenses were held constant for the life of the properties. Severance and ad valorem taxes were deducted in the lease reserves and economics projections at the standard state rates.



Joe C. Neal & Associates is an Independent Petroleum and Environmental Engineering Consulting Firm that has been providing Petroleum Consulting Services throughout the world for thirty eight (38) years. Joe C. Neal & Associates does not have any financial interest, including stock ownership in Mexico. Our fees were not contingent on the results of our evaluation. Joe C. Neal & Associates has used all procedures and methods that it considered necessary to prepare this report. The technical persons responsible for preparing the reserve estimates presented herein meet the requirements regarding qualification, independence, objectivity, and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers.

This report is solely for the information of and assistance to Mexco Energy Corporation for their use in SEC filings. It is not to be used, circulated, quoted, or otherwise referred to for any purpose without the express written consent of the undersigned except as required by law. Data utilized in this report will be maintained in our files and is available for your use. It has been our privilege to serve you by preparing this evaluation.

In summary, we consider the assumptions, data, methods and analytical procedures used in this report appropriate for the purpose hereof, and we have used all such methods and procedures that we consider necessary and appropriate to prepare the estimates of reserves herein. The proved reserves included herein were determined in conformance with the SEC Modernization of Oil and Gas Reporting; Final Rule, including all references to Regulation S-X and Regulation S-K, referred to herein collectively as the “SEC Regulations.” In our opinion, the proved reserves presented in this report comply with the definitions, guidelines and disclosure requirements as required by the SEC regulations.

Yours Very Truly,

/s/ Joe C. Neal & Associates

Joe C. Neal & Associates

Licensed Professional Engineer

Registration Number: 23238

Registered Professional Engineering Firm

Registration Number: F-001308



# DEFINITIONS OF OIL AND GAS RESERVES
17 CFR § 210.4-10 Federal Register Dated December 31, 2008/Filed January 13, 2009

## Developed oil and gas reserves

Developed oil and gas reserves are reserves of any category that can be expected to be recovered:

(i) Through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and

(ii) Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

## Undeveloped oil and gas reserves

Undeveloped oil and gas reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

(i) Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances.

(ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time.

(iii) Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.

## Proved oil and gas reserves \( ^{1} \) 

Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible - from a given date forward from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

(i) The area of the reservoir considered as proved includes:

(A) The area identified by drilling and limited by fluid contacts, if any, and

(B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.

(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.

(iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.



(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when:

(A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and

(B) The project has been approved for development by all necessary parties and entities, including government entities.

(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-date-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

 \( ^{1} \)  Joe C. Neal & Associates separates proved developed reserves into proved developed producing and proved developed nonproducing reserves. This is to identify proved developed producing reserves as those to be recovered from actively producing wells; proved developed nonproducing reserves as those to be recovered from wells or intervals within wells, which are completed but shut in waiting on equipment or pipeline connections, or wells where a relatively minor expenditure is required for recompletion to another zone.