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| ROYL > SEC Filings for ROYL > Form 10-Q on 3-Nov-2008 | All Recent SEC Filings |
3-Nov-2008
Quarterly Report
Forward Looking Statements
In addition to historical information contained herein, this discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, subject to various risks and uncertainties that could cause our actual results to differ materially from those in the "forward-looking" statements. While we believe our forward looking statements are based upon reasonable assumptions, there are factors that are difficult to predict and that are influenced by economic and other conditions beyond our control. Investors are directed to consider such risks and other uncertainties discussed in documents filed by the company with the Securities and Exchange Commission.
Results of Operations
During the third quarter ended September 30, 2008, we had a net profit of $1,373,491 compared to the net loss of $121,125 we had during the third quarter of 2007, a $1,494,616 difference. Our increase in net profit is attributed to a gain from the sale of assets. Moreover, total revenue for the third quarter of 2008 increased by $181,083 from $4,777,239 in 2007 to $4,958,322 in 2008. This increase in total revenue is the result of an increase in oil and gas production revenues. Our operating income for the quarter ended September 30, 2008 also increased to $2,128,256 from an operating loss of $138,160 for the same period in 2007, an increase of $2,266,416. The increase in operating income was also due to a gain from the sale of assets.
For the first nine months of 2008, we had a net income of $1,206,261 compared to a net loss of $1,138,485 during the first nine months of 2007, a $2,344,746 difference. This improvement was the result of increases in both of our sectors, oil and natural gas production and turnkey drilling. In addition, the increase in our net income is also attributed to a gain from the sale of assets. Total revenues for the first nine months in 2008 were $12,659,146, an increase of $1,293,850 or 11.4%, from the total revenues of $11,365,296 during the same period in 2007 due to increases oil and gas revenues and turnkey drilling revenues.
In the first nine months of 2008, revenues from oil and gas production increased $1,283,099 or 28.2% to $5,835,278 from $4,552,179 for the same period in 2007 due to higher prices received for our oil and natural gas production. The net sales volume of natural gas for the nine months ended September 30, 2008, was approximately 535,777 Mcf with an average price of $9.13 per Mcf, versus 600,579 Mcf with an average price of $6.51 per Mcf for the first nine months of 2007. This represents a decrease in net sales volume of 64,802 Mcf or 10.8%, mainly due to the natural declines in production from existing wells. For the quarter ended September 30, 2008, we produced 158,323 Mcf with an average price of $8.31 per Mcf versus 190,962 Mcf produced during the same quarter in 2007 with an average price of $5.74 per Mcf, or a 45% increase in the average price per Mcf. The net sales volume for oil and condensate (natural gas liquids) was 9,029 barrels with an average price of $104.77 per barrel for the first nine months of 2008, compared to 10,872 barrels at an average price of $58.87 per barrel for the first nine months in 2007. This represents a decrease in net sales volume of 1,843 barrels, or 16.9%. For the third quarter of 2008, oil and condensate production decreased 466 barrels, or 15.1%, from 3,090 barrels produced in 2007 to 2,623 barrels produced in the same period in 2008. This decrease was mainly due to the natural declines in production from existing wells.
Oil and natural gas lease operating expenses decreased by $108,263 or 5.5%, to $1,861,884 for the nine months ended September 30, 2008, from $1,970,147 for the same period in 2007. This decrease was mainly due to lower workover costs during the period in 2008. For the third quarter 2008, lease operating expenses increased $2,438 over the same period in 2007.
For the nine months ended September 30, 2008, turnkey drilling revenues increased $247,653 or 4.1% to $6,269,545 from $6,021,892 during the same period in 2007. We also had a $30,440 or 1% decrease in turnkey drilling and development costs to $2,926,379 in 2008 from $2,956,819 in 2007. In the third quarter of 2008, turnkey drilling revenues decreased $190,352, or 5.9%, while turnkey drilling and development costs increased by $328,262, or 21.6%, over the same quarter in 2007. Turnkey drilling revenues decreased in the third quarter due to lower turnkey revenues from the wells drilled during the period in 2008 compared to the wells drilled during the same period in 2007. Turnkey drilling costs increased because we drilled and completed three wells during the third quarter of 2008, while in the same period in 2007 two wells were drilled. We expect drilling activity to increase during the fourth quarter of 2008. Prior to September 30, we began drilling one well in Utah and in mid October started drilling another well in California. We also processed the permits on three additional wells in California and one in Utah. In total, we expect to drill approximately four wells during the fourth quarter of 2008.
We periodically review our proved properties for impairment on a field-by-field basis and charge impairments of value to the expense. Impairment losses of $820,966 and $34,894 were recorded in the first nine months of 2008 and 2007, respectively. These impairments were mainly due to various lease and land costs that were no longer viable.
In September 2008, the company sold its Rio Bravo field located in Kern County, California for $4.75 million, resulting in a net gain from the sale of $2,637,203. During the first quarter in 2008, we also recorded a loss of $27,823 on the sale of a non-oil and gas asset.
The aggregate of supervisory fees and other income was $554,323 for the nine months ended September 30, 2008, a decrease of $236,902 (29.9%) from $791,225 during the same period in 2007. Third quarter supervisory fees and other income decreased $75,503, or 27.8%, to $196,310 from $271,813 in 2007. These decreases were due to lower interest income received on our available cash and lower cost recovery fees on facilities as the result of lower natural gas production.
Depreciation, depletion and amortization expense decreased to $2,601,622 from $2,905,024, a decrease of $303,402 (10.4%) for the nine months ended September 30, 2008, as compared to the same period in 2007. This decrease in depletion expense was mainly due to the decrease in our oil and gas assets from our 2007 impairments.
General and administrative expenses decreased by $304,151 or 9.1%, from $3,345,386 for the nine months ended September 30, 2007, to $3,041,235 for the period in 2008. Third quarter 2008 general and administrative expense decreased $52,760, or 4.9% from $1,069,442 in 2007 compared to $1,016,682 in 2008. These decreases were primarily due lower employee related travel and insurance costs due to our cost control measures.
Marketing expense for the three quarters ended September 30, 2008, decreased $164,006, or 15.2%, to $916,625, compared to $1,080,631 for the same period in 2007. For the third quarter,
Legal and accounting expense increased to $1,067,197 for the nine months of 2008, compared to $629,480 for same period in 2007, a $437,717 or 69.5% increase. For the third quarter, legal and accounting expenses decreased by $283,663, or 82.2% from the same period last year. The increase in legal and accounting expense for the first nine months of 2008 stems from higher legal fees relating to a litigation defending property rights during the period, which culminated in a trial and a successful outcome for the company in April. See
Interest expense increased to $195,408 for the three quarters ended September 30, 2008, from $116,435 for the same period in 2007, a $78,973, or 67.8% increase. This was due to an increase in the usage of our bank line of credit. For the nine months ended September 30, 2008, income tax expense increased $1,204,112 from a benefit of $579,966 in 2007 to an expense of $624,146 in 2008. The change is the result of the company operating from a net operating loss in 2007 to a net operating profit in 2008.
Capital Resources and Liquidity
At September 30, 2008, Royale Energy had current assets totaling $13,015,612 and current liabilities totaling $13,154,160, for a $138,548 working capital deficit. We had cash and cash equivalents at September 30, 2008 of $6,663,717 compared to $3,848,968 at December 31, 2007. During the nine months ended September 30, 2008, we repaid $2,600,000 on our commercial bank credit line and loan.
We have a revolving line of credit under a loan agreement with Guaranty Bank, FSB, which is secured by all of our oil and gas properties. At September 30, 2008, we had outstanding indebtedness on this loan of $2,575,974, compared to $5,175,974 at December 31, 2007.
At September 30, 2008, our accounts receivable totaled $4,542,624, compared to $4,090,341 at December 31, 2007, a $452,283 (11.1%) increase, primarily due to higher receivables from industry members participating in wells we drilled during 2008. At September 30, 2008, our accounts payable and accrued expenses totaled $5,001,620, a decrease of $5,078,414 or 50.4% from the accounts payable at December 31, 2007, of $10,080,034. This decrease was due to the payments on trade account payables.
We ordinarily fund our operations and cash needs from cash flows generated from operations. We believe that we have sufficient liquidity for the remainder of 2008 and do not foresee any liquidity demands that cannot be met from cash flow or financing activities.
Operating Activities. For the three quarters ended September 30, 2008, cash provided by operating activities totaled $1,001,852 compared to $4,304,038 for the same period in 2007, a $3,302,186 or 76.7% decrease. This decrease in cash provided was due to a decrease in our accounts payable and accrued expenses.
Investing Activities. Net cash provided by investing activities amounted to $582,898 for the first
Financing Activities. For the nine months ended September 30, 2008, cash provided by financing activities was $1,229,999 compared to $2,715,094 used by financing activities for the same period in 2007, a $3,945,093 difference. In the second quarter of 2008 we received net proceeds of $3,724,999 from the sale of common stock and warrants to one investor in a private placement. The proceeds were used to pay $2,000,000 to reduce long term debt payments and for working capital. We also received $105,000 from the exercise of stock options.
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