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| ROYL > SEC Filings for ROYL > Form 10-Q on 15-May-2012 | All Recent SEC Filings |
15-May-2012
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 first quarter of 2012, we had a net loss of $1,188,759 compared to net income of $76,853 during the first quarter of 2011, a $1,265,612 change. Total revenues for the first quarter in 2012 were $952,460, a decrease of $1,882,696 or 66.4% from the total revenues of $2,835,156 during the period in 2011. The lower net profits and revenues were the result of decreases in both natural gas production and price received and lower turnkey drilling revenues due to a decrease in drilling activity during the quarter in 2012, when compared to 2011.
In the first quarter of 2012, revenues from oil and gas production decreased $940,665 or 65.4% to $496,894 from the 2011 first quarter revenues of $1,437,559. This decrease was due to lower natural gas production, stemming from the natural declines of our existing wells and lower commodity prices received during first quarter in 2012. The net sales volume of natural gas for the quarter ended March 31, 2012, was approximately 169,371 Mcf with an average price of $2.63 per Mcf, versus 342,092 Mcf with an average price of $4.04 per Mcf for the first quarter of 2011. This represents a decrease in net sales volume of 172,721 Mcf or 50.5%. The net sales volume for oil and condensate (natural gas liquids) production was 527 barrels with an average price of $94.64 per barrel for the first three months of 2012, compared to 640 barrels at an average price of $88.54 per barrel for the first three months in 2011. This represents a decrease in net sales volume of 113 barrels, or 17.7%.
Oil and natural gas lease operating expenses decreased by $10,598 or 3.5%, to $295,510 for the quarter ended March 31, 2012, from $306,108 for the quarter in 2011. This decrease was mainly due to lower plugging and abandoning costs during the period in 2012.
For the quarter ended March 31, 2012, turnkey drilling revenues decreased $944,989 or 79% to $250,882 from $1,195,871 in the same quarter in 2011. We also had an $880,614 or 92.6% decrease in turnkey drilling and development costs to $70,400 in 2012 from $951,014 in 2011. During the first three months of 2012 we did not drill any wells, due to the lower overall natural gas commodity prices, while during the same period in 2011 we drilled two wells in California. Thus far in 2012, we have processed permits on one well in California, which we expect to drill during the second quarter of 2012.
The aggregate of supervisory fees and other income was $204,684 for quarter ended March 31, 2012, an increase of $2,958 or 1.5% from $201,726 during the period in 2011. This increase was the result of higher overhead rates during the period in 2012.
Depreciation, depletion and amortization expense decreased to $363,462 from $529,447, a decrease of $165,985 or 31.4% for the quarter ended March 31, 2012, as compared to the same period in 2011. This decrease in depletion expense was mainly due to the decrease in our oil and gas assets from our 2011 impairments.
General and administrative expenses decreased by $27,842 or 2.7% from $1,047,794 for the quarter ended March 31, 2011, to $1,019,952 for the period in 2012. This decrease was primarily due to lower share based compensation expense during the period in 2012. Marketing expense for the quarter ended March 31, 2012, decreased $26,385, or 14.6%, to $154,219, compared to $180,604 for the same period in 2011. 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 $270,303 for the period, compared to $403,211 for the same period in 2011, a $132,908 or 33% decrease. The decrease in legal and accounting expense was a result of a litigation settlement reached during the period in 2011.
During 2011, we began laying the ground work for a new seismic survey in Northern California. A majority of the actual seismic work took place during the first quarter of 2012. As a result we recorded Geological and Geophysical expenses of $359,029 during the first quarter of 2012 and $41,909 during the same period in 2011. During the first quarter of 2011, we sold our working interest in two separate non-core properties resulting in a gain of $785,132. The properties were located in Kern County, California and Gaines County, Texas. In 2012, we recorded a gain of $1,307 on the sale of a non-oil and gas asset. Additionally during 2012, we had a write down of $62,744 on certain oil and gas inventory to its estimated current market value.
Interest expense decreased to $32,738 for the quarter ended March 31, 2012, from $38,218 for the same period in 2011, a $5,480, or 14.3% decrease. This was due to a lower balance on our existing bank line of credit. For the first quarter in 2012, we had income tax benefit of $485,831 due to a net operating loss. However, for the same period in 2011, we had an income tax expense of $45,130 due to net operating income.
Capital Resources and Liquidity
At March 31, 2012, Royale Energy had current assets totaling $ 6,381,083and current liabilities totaling $13,004,809, a $ 6,623,726 working capital deficit. We had cash and cash equivalents at March 31, 2012, of $3,090,907 compared to $2,946,131 at December 31, 2011.
In February 2009, we entered into a revolving credit agreement with Texas Capital Bank, N.A. secured by our oil and gas properties, of up to $14,250,000. We also entered into a separate letter of credit facility with Texas Capital Bank 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 March 31, 2012, we had a current borrowing base of $2,350,000 and outstanding indebtedness on this loan of $2,350,000, which was reclassified to current liabilities as it reaches maturity February 13, 2013.
At March 31, 2012, 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 March 31, 2012, our accounts receivable totaled $1,601,348, compared to $1,872,067 at December 31, 2011, a $270,719 14.5% decrease. This was primarily due to lower oil and gas receivables due to a decline in natural gas production and prices at March 31, 2012 when compared to the year end December 31, 2011. At March 31, 2012, our accounts payable and accrued expenses totaled $4,824,173, an increase of $281,432 or 6.2% from the accounts payable at December 31, 2011, of $4,542,741, mainly due to an increase in payables related the seismic survey that took place in March 2012.
Ordinarily, we fund our operations and cash needs from our available credit and cash flows generated from operations. We believe that we have sufficient liquidity for the remainder of 2012 and do not foresee any liquidity demands that cannot be met from cash flow or financing activities.
Operating Activities. Net cash provided by operating activities totaled $303,522 and $460,532 for the three month period ended March 31, 2012 and 2011, respectively. This $157,010 or 34.1% decrease in cash provided was mainly due to lower accounts receivable for the period in 2012, due to our lower oil and natural gas revenues.
Investing Activities. Net cash used by investing activities, primarily in capital acquisitions of oil and gas properties, amounted to $344,584 and $1,366,907 for the three month period ended March 31, 2012 and 2011, respectively. This decrease in capital acquisition costs was due to the drilling of two wells during the period in 2011 while there was no drilling of new wells during the period in 2012. During the first quarter of 2012, Royale also received proceeds of $1,307 relating to a sale of stock. In the first quarter of 2011, we received proceeds of $225,000 relating to the sale of certain oil and natural gas properties in Kern County, California.
Financing Activities. Net cash provided by financing activities totaled $185,838 and $313,231 for the three month period ended March 31, 2012 and 2011, respectively. During the quarter ended March 31, 2012, options were exercised by one director for a total of 88,692 shares of the Company's common stock in exchange for proceeds of $299,499. Additionally during the period, Royale received proceeds of $286,339 and issued 53,676 shares of its common stock relating to its market equity offering program. Also during the period in 2012, four director's exchanged 150,000 options in a cashless exercise for 62,350 common shares. During the first quarter of 2011, several warrants were exercised in exchange for shares of Royale's common stock. Royale received $613,231 and issued 268,811 shares of its common stock relating to these exercises.
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