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| ROYL > SEC Filings for ROYL > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
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
For the six months ended June 30, 2009, we had a net loss of $1,185,787 compared to a net loss of $167,230 during the first six months of 2008, a $1,018,557 difference. Total revenues for the first six months of 2009 were $3,568,565, a decrease of $4,132,259 or 53.7% from the total revenues of $7,700,824 during the period in 2008. This decrease in revenues was the result of decreases in oil and natural gas commodity prices affecting our oil and natural gas production revenues. The decline in revenues was also the result of lower turnkey drilling revenues due to lower direct working interest sales for the period in 2009. For the quarter ended June 30, 2009 our net loss was $294,731 compared to a net profit of $760,230, again as a result of lower oil and natural gas prices and lower turnkey drilling revenues.
In the first six months of 2009, revenues from oil and gas production decreased $2,628,670 or 64.3% to $1,461,505 from 2008 first half revenues of $4,090,175, due to lower prices received for our oil and natural gas production. The net sales volume of natural gas for the six months ended June 30, 2009, was approximately 322,789 Mcf with an average price of $3.97 per Mcf, versus 368,127 Mcf with an average price of $9.45 per Mcf for the first six months of 2008. This represents a decrease in net sales volume of 45,338 Mcf or 12.3%, mainly due to the natural declines in production from existing wells. For the quarter ended June 30, 2009, we produced 145,861 Mcf with an average price of $3.45 per Mcf versus 190,980 Mcf produced during the same quarter in 2008 with an average price of $10.59 per Mcf, which represents a 45,119 Mcf or 23.6% decrease in net sales volume. The net sales volume for oil and condensate (natural gas liquids) was 4,358 barrels with an average price of $41.30 per barrel for the first six months of 2009, compared to 6,279 barrels at an average price of $97.60 per barrel for the first six months in 2008. This represents a decrease in net sales volume of 1,921 barrels, or 30.6%. For the second quarter of 2009, oil and condensate produced decreased 646 barrels, or 21.5%, from 3,002 barrels produced in 2008 to 2,356 barrels produced in the same period in 2009. This decrease was mainly due to the natural declines in production from existing wells.
Oil and natural gas lease operating expenses decreased by $491,802 or 38.7%, to $779,872 for the six months ended June 30, 2009, from $1,271,674 for the same period in 2008. For the second quarter 2009, lease operating expenses decreased $254,678 or 43.3% over the same period in 2008. These decreases were mainly due to lower workover and plugging costs during the period in 2009.
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 $15,359 and $50,104 were recorded in the first six months of 2009 and 2008, respectively. These impairments were mainly due to various lease and land costs that were no longer viable. Also during the periods in 2009 and 2008, we recorded losses of $33,482 and $27,823, respectively, on the sales of non-oil and gas assets.
The aggregate of supervisory fees and other income was $297,686 for the six months ended June 30, 2009, a decrease of $60,327 (16.9%) from $358,013 during the same period in 2008. Second quarter supervisory fees and other income decreased $21,784, or 12.1%, to $158,560 from $180,344 in 2008. These decreases were due to lower interest income received on our available cash and to lower cost recovery fees on facilities due to lower natural gas production.
Depreciation, depletion and amortization expense decreased to $1,058,124 from $1,805,725, a decrease of $747,601 (41.4%) for the six months ended June 30, 2009, as compared to the same period in 2008. This decrease in depletion expense was mainly due to the decrease in our oil and gas assets from our 2008 impairments.
General and administrative expenses decreased by $237,005 or 11.7%, from $2,024,553 for the six months ended June 30, 2008, to $1,787,548 for the period in 2009. Second quarter 2009 general and administrative expense decreased $165,448, or 16% from $1,033,349 in 2008 compared to $867,901 in 2009. Theses decreases were primarily due to our cost control measures.
Marketing expense for the six months ended June 30, 2009, decreased $158,000, or 29.3%, to $381,020, compared to $539,020 for the same period in 2008. For the second quarter, marketing expenses decreased $143,213, or 46%, to $168,313 from $311,526 for the same period in 2008. Marketing expense varies from period to period according to the number of marketing events attended by personnel and their associated costs.
Legal and accounting expense decreased to $528,419 for the first six months of 2009, compared to $1,005,784 for same period in 2008, a $477,365 or 47.5% decrease. For the second quarter, legal and accounting expenses decreased by $312,226, or 65.9% from the previous period last year. The decrease in legal and accounting expense was a result of lower legal fees due to litigation defending property rights in 2008, which culminated in a trial and a successful outcome
Interest expense decreased to $41,096 for the two quarters ended June 30, 2009, from $150,109 for the same period in 2008, a $109,013, or 72.6% decrease. This was due to a decrease in the usage of our bank line of credit. For the same periods in 2009 and 2008, we also had income tax benefits of $757,112 and $85,320, respectively, due to net operating losses in both periods.
Capital Resources and Liquidity
At June 30, 2009, Royale Energy had current assets totaling $4,903,533 and current liabilities totaling $10,568,794, for a $5,665,261 working capital deficit. We had cash and cash equivalents at June 30, 2009 of $898,635 compared to $1,330,739 at December 31, 2008.
During 2008, Royale Energy maintained a revolving credit agreement with Guaranty Bank, FSB, secured by all of our oil and gas properties, which at December 31, 2008, had outstanding indebtedness of $1,975,974. In February 2009, the Guaranty Bank loan was repaid and we entered into a new agreement with Texas Capital Bank, N.A. for a new revolving line of credit and letter of credit facility, also secured by our oil and gas properties, of up to $14,250,000 and separate letter of credit facility of up to $750,000, for the purposes of refinancing Royale's existing debt and to fund development, exploration and acquisition activities as well as other general corporate purposes. Under the terms of the agreement, Royale Energy may borrow, repay, and re-borrow funds as necessary. At June 30, 2009, we had outstanding indebtedness on this loan of $2,654,181. Unused available credit from this revolving line of credit totaled approximately $345,819 at June 30, 2009.
At June 30, 2009, we were not in compliance with the current ratio financial covenant of our loan agreement with the bank, but we have obtained a waiver from the terms of that loan covenant. We are not in default on any principal, interest or sinking fund payment.
At June 30, 2009, our accounts receivable totaled $1,979,088, compared to $3,750,557 at December 31, 2008, a $1,771,469 (47.2%) decrease, primarily due to lower receivables from an industry member participating in wells we drilled at the end of 2008. At June 30, 2009, our accounts payable and accrued expenses totaled $5,863,504, a decrease of $4,456,683 or 43.2% from the accounts payable at December 31, 2008, of $10,320,187. This decrease was due to applying prepaid drilling remittances to trade accounts payable as aided by payments on other trade account payables.
On April 1, 2008, Nasdaq notified Royale that it was not in compliance with the requirement that companies listed on the Nasdaq Global Market are required by Marketplace Rule 4450(a)(3) to maintain a minimum of $10 million in stockholders' equity for continued listing. Royale has formulated and is pursuing a plan to raise additional equity financing to take advantage of investment opportunities in oil and natural gas prospects, and Royale submitted those plans to Nasdaq as part of its program to regain compliance with the Nasdaq Global Market listing requirements. While Royale pursues its equity financing plans, Royale decided to transfer its securities listing from the Nasdaq Global Market to the Nasdaq Capital Market, effective on July 31, 2009. Royale complies with the Capital Market listing requirements. Royale does not
Royale plans to raise the additional equity capital as part of its overall capital and cash flow needs to support ongoing acquisition and exploration operations.
Operating Activities. For the two quarters ended June 30, 2009, cash used by operating activities totaled $904,921 compared to operating activities providing $4,109,682 for the same period in 2008, a $5,041,603 or 122% decrease. This decrease in cash provided was due to a decrease in our accounts payable and direct working interest sales during the period in 2009.
Investing Activities. Net cash used by investing activities, primarily in capital acquisitions of oil
and gas properties, amounted to $205,390 for the first six months of 2009, compared to $1,578,503 used by investing activities for the same period in 2008, a $1,373,113 or an 87% decrease in cash used. This decreased capital acquisition was due to lower drilling expenditures during the period in 2009.
Financing Activities. For the six months ended June 30, 2009, cash provided by financing activities was $678,207 compared to $1,829,999 for the same period in 2008, a $1,151,792 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 reduce long term debt and for working capital. Moreover, in the first quarter of 2009, we paid off our line of credit with Guaranty Bank and established a new one with Texas Capital Bank.
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