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| ROYL > SEC Filings for ROYL > Form 10-Q on 13-Aug-2012 | All Recent SEC Filings |
13-Aug-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 six months ended June 30, 2012, we had a net loss of $2,263,715 compared to net income of $336,200 during the same period in 2011, a $2,599,915 change. Total revenues for the first six months in 2012 were $1,829,949, a decrease of $4,481,852 or 71.0% from the total revenues of $6,311,801 during the same period in 2011. For the quarter ended June 30, 2012, we had a net loss of $1,074,956 compared to net income of $259,347 during the second quarter in 2011, a $1,334,303 difference. The lower net profits and revenues during the periods 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 period in 2012.
During the first six months of 2012, revenues from oil and gas production decreased $2,434,230 or 73.7% to $867,844 from the 2011 six month revenues of $3,302,074. This decrease was due to lower natural gas and oil production, stemming from the natural declines of our existing wells and lower commodity prices received during the period in 2012. The net sales volume of natural gas for the six months ended June 30, 2012, was 315,421 Mcf with an average price of $2.49 per Mcf, versus 759,395 Mcf with an average price of $4.20 per Mcf for the period in 2011. This represents a decrease in net sales volume of 443,974 Mcf or 58.5%. For the quarter ended June 30, 2012, revenues from oil and gas production decreased $1,493,565 or 80.1% to $370,950 from the 2011 second quarter revenues of $1,864,515. During the second quarter 2012, we produced 146,050 Mcf with an average price of $2.33 per Mcf versus 417,303 Mcf produced during the same quarter in 2011 with an average price of $4.33 per Mcf, which represents a 271,253 Mcf or 65.0% decrease in net sales volume. The net sales volume for oil and condensate (natural gas liquids) production was 855 barrels with an average price of $94.13 per barrel for the first six months of 2012, compared to 1,233 barrels at an average price of $93.61 per barrel for the first six months in 2011. This represents a decrease in net sales volume of 378 barrels, or 30.7%. For the quarter ended June 30, 2012, oil and condensate production decreased 264 barrels, or 44.6%, from 592 barrels produced during the period in 2011 to 328 barrels produced in the same period in 2012.
Oil and natural gas lease operating expenses decreased by $193,720 or 24.2%, to $606,331 for the six months ended June 30, 2012, from $800,051 for the six months in 2011. For the second quarter 2012, lease operating expenses decreased $183,122 or 37.1% from the same period in 2011. These decreases were mainly due to lower plugging and transportation costs during the period in 2012.
For the six months ended June 30, 2012, turnkey drilling revenues decreased $1,914,633 or 76.4% to $592,558 from $2,507,191 in the same period in 2011. We also had a $1,235,819 or 86.7% decrease in turnkey drilling and development costs to $190,158 in 2012 from $1,425,977 in 2011. For the second quarter of 2012, turnkey drilling revenues decreased $969,644 or 73.9% while turnkey drilling and development costs also decreased $355,205 or 74.8%. During the first six 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 three wells in California.
The aggregate of supervisory fees and other income was $369,547 for the six months ended June 30, 2012, a decrease of $132,989 or 26.5% from $502,536 during the period in 2011. During the second quarter 2012, supervisory fees decreased $135,947. These decreases were due to lower pipeline and compressor fees as a result of lower natural gas production during the period in 2012.
Depreciation, depletion and amortization expense decreased to $737,119 from $1,246,561, a decrease of $509,442 or 40.9% for the six months ended June 30, 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 $29,943 or 1.5% from $2,041,390 for the six months ended June 30, 2011, to $2,011,447 for the period in 2012. For the second quarter 2012, general and administrative expenses decreased $2,101 when compared to the same period in 2011. These decreases were primarily due to lower share based compensation expense during the period in 2012. Marketing expense for the six months ended June 30, 2012, decreased $99,351, or 23.3%, to $326,141, compared to $425,492 for the same period in 2011. For the second quarter 2012, marketing expenses decreased $72,966 or 29.8% when compared to the second quarter 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 $419,875 for the six month period, compared to $497,979 for the same period in 2011, a $78,104 or 15.7% decrease. For the second quarter 2012, legal and accounting expenses increased by $54,804 or 57.8% from the same period in 2011. The overall 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. We recorded Geological and Geophysical expenses of $422,686 during the first six months of 2012 and $66,968 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. During the period in 2012, we recorded a gain of $1,737 on the sale of a non-oil and gas asset. Additionally during the period in 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 $68,362 for the six months ended June 30, 2012, from $75,450 for the same period in 2011, a $7,088, or 9.4% decrease. This was due to a lower balance on our existing bank line of credit. For the six month period in 2012, we had income tax benefit of $931,089 due to a net operating loss. However, for the same period in 2011, we had an income tax expense of $188,889 due to net operating income.
Capital Resources and Liquidity
At June 30, 2012, Royale Energy had current assets totaling $5,642,975 and current liabilities totaling $12,682,995, a $7,040,020 working capital deficit. We had cash and cash equivalents at June 30, 2012, of $2,470,550 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 June 30, 2012, we had a current borrowing base of $1,550,000 and outstanding indebtedness on this loan of $1,550,000, which is classified as a current liability as it reaches maturity on February 13, 2013.
At June 30, 2012, we were not in compliance with the current ratio financial covenant, the tangible net worth financial covenant and the interest coverage ratio of our loan agreement with the bank, but we have obtained a waiver from the terms of those loan covenants. We are not in default on any principal, interest or sinking fund payment.
At June 30, 2012, our accounts receivable totaled $1,522,538, compared to $1,872,067 at December 31, 2011, a $349,529 or 18.7% decrease. This was primarily due to lower oil and gas receivables due to a decline in natural gas production and prices at June 30, 2012 when compared to the year-end December 31, 2011. At June 30, 2012, our accounts payable and accrued expenses totaled $4,434,420, a decrease of $108,321 or 2.4% from the accounts payable at December 31, 2011, of $4,542,741, mainly due to a decrease in revenues payable from the lower oil and gas production and revenues.
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 such as our current Preferred Stock Offering and effective Form S-3 filed with the SEC.
Operating Activities. Net cash used by operating activities totaled $54,334 for the six month period ended June 30, 2012 and net cash provided by operating activities totaled $1,977,654 for the six month period ended June 30, 2011. This $2,031,988 difference was mainly due to our lower oil and natural gas revenues and lower decreases in accounts payable for the period in 2012.
Investing Activities. Net cash used by investing activities, primarily in capital acquisitions of oil and gas properties, amounted to $377,882 and $1,436,611 for the six month period ended June 30, 2012 and 2011, respectively. This decrease in capital acquisition costs was due to the drilling of three wells during the period in 2011 while there was no drilling of new wells during the period in 2012. During the six month period in 2012, Royale also received proceeds of $1,737 relating to a sale of stock. During the same period in 2011, we received proceeds of $806,353 relating to the sale of certain oil and natural gas properties in Kern County, California and Gaines County, Texas.
Financing Activities. Net cash used by financing activities totaled $43,365 and provided $1,101,489 for the six month period ended June 30, 2012 and 2011, respectively. This difference was primarily due to principal payments totaling $1,200,000 on the Company's letter of credit facility with Texas Capital Bank, during the period on 2012. During first six months of 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 $857,136 and issued 168,697 shares of its common stock relating to its market equity offering program. The proceeds were added to working capital and used for ordinary operating expense. Also during the period in 2012, five directors exchanged 195,000 options in a cashless exercise for 76,346 common shares. During the first six months of 2011, several warrants were exercised in exchange for shares of Royale's common stock. Royale received $1,051,489 and issued 468,928 shares of its common stock relating to these exercises.
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