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ROYL > SEC Filings for ROYL > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for ROYALE ENERGY INC

Form 10-Q for ROYALE ENERGY INC


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 nine months ended September 30, 2012, we had a net loss of $3,028,789, a $2,954,756 increase compared to the net loss of $74,033 during the first nine months of 2011. Total revenues for the first nine months of 2012 were $2,467,187, a decrease of $6,318,842 or 71.9% from the total revenues of $8,786,029 received during the period in 2011. For the quarter ended September 30, 2012, our net loss was $765,074, a $354,841 increase compared to the net loss of $410,233 achieved during the same period in 2011. 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.

In the first nine months of 2012, revenues from oil and gas production decreased $3,004,071 or 70.5% to $1,255,321 from 2011 revenues of $4,259,392. 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 nine months ended September 30, 2012, was approximately 444,723 Mcf with an average price of $2.58 per Mcf, versus 977,190 Mcf with an average price of $4.19 per Mcf for the first nine months of 2011. This represents a decrease in net sales volume of 532,467 Mcf or 54.5%. For the quarter ended September 30, 2012, revenues from oil and gas decreased to $387,477 from $957,318 received during the same period in 2011. During the third quarter in 2012, we produced 129,303 Mcf with an average price of $2.80 per Mcf versus 217,795 Mcf produced during the same quarter in 2011 with an average price of $4.17 per Mcf, which represents an 88,492 Mcf or 40.6% decrease in net sales volume. For the first nine months of 2012, revenues from oil and condensate (natural gas liquids) decreased $53,930 or 33.9% to $105,293 from 2011 nine month revenues of $159,223. The net sales volume for the nine month period in 2012 was 1,151 barrels with an average price of $91.46 per barrel, compared to 1,789 barrels with an average price of $89.00 per barrel for the period in 2011. This represents a decrease in net sales volume of 638 barrels, or 35.7%. For the third quarter of 2012, oil and condensate production decreased 261 barrels, or 46.9%, from 557 barrels produced in 2011 to 296 barrels produced in the same period in 2012.

Oil and natural gas lease operating expenses decreased by $300,157 or 25.5%, to $878,966 for the nine months ended September 30, 2012, from $1,179,123 for the same period in 2011. For the third quarter of 2012, lease operating expenses decreased $106,437 or 28.1% over the same period in 2011. These decreases were mainly due to lower plugging and transportation costs during the period in 2012.

For the nine months ended September 30, 2012, turnkey drilling revenues were $676,149, a $3,172,188 or 82.4% decrease compared to revenues of $3,848,337 for the same period in 2011. We also had a $2,259,660 or 107.3% decrease in turnkey drilling and development costs to ($153,549) in 2012 from $2,106,111 in 2011. During the first nine 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 five wells in California. However during the period in 2012, we did have an adjustment to previously expensed drilling and development costs due to lower than anticipated completion costs for wells that commenced drilling prior to 2012. We anticipate drilling activity to resume in the next quarter as we have processed permits for several new wells, and expect to drill approximately two California wells during the fourth quarter of 2012.

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 $202,127 and $11,452 were recorded in the first nine months of 2012 and 2011, respectively. These impairments were mainly due to various lease and land costs that were no longer viable. Additionally during the periods in 2012 and 2011, we recorded $423,459 and $88,883, respectively in geological and geophysical costs in order to increase our oil and natural gas prospect base.


Table of Contents

The aggregate of supervisory fees and other income was $535,717 for the nine months ended September 30, 2012, a decrease of $142,583 or 21% from $678,300 during the same period in 2011. Third quarter 2012 supervisory fees and other income decreased $9,594, or 5.5%, to $166,170 from $175,764 in 2011, 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 $1,394,028 from $1,966,094, a decrease of $572,066 or 29.1% for the nine months ended September 30, 2012, as compared to the same period in 2011. This decrease in depletion expense was mainly due to the lower production volumes and to the decrease in our oil and gas assets from our 2011 impairments.

General and administrative expenses decreased by $119,585, or 4.1%, from $2,952,635 for the nine months ended September 30, 2011, to $2,833,050 for the period in 2012. This decrease was primarily due to decreased employee related costs. Third quarter 2012 general and administrative expense decreased $89,642, or 9.8% from $911,245 in 2011 compared to $821,603 in 2012.

Marketing expense for the nine months ended September 30, 2012, decreased $121,040, or 19.2%, to $508,302 compared to $629,342 for the same period in 2011. For the third quarter 2012, marketing expenses decreased $21,689, or 10.6%, to $182,161 from $203,850 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 $500,647 for the first nine months of 2012, compared to $619,768 for same period in 2011, an $119,121 or 19.2% decrease. For the third quarter 2012, legal and accounting expenses decreased by $41,017, or 33.7% from the same period last year.

Interest expense decreased to $87,401 for the nine months ended September 30, 2012, from $113,876 for the same period in 2011, a $26,475, or 23.3% decrease. This was due to a lower balance on our existing bank line of credit. For the nine months ended September 30, 2012 we had an income tax benefit of $1,237,915 due to our current period net operating loss. During the nine month period in 2011 we had income tax benefit of $31,810 due to a net operating loss.

Capital Resources and Liquidity

At September 30, 2012, Royale Energy had current assets totaling $4,807,690 and current liabilities totaling $12,104,904, a $7,297,214 working capital deficit. We had cash and cash equivalents at September 30, 2012, of $1,569,069 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 September 30, 2012, we had a current borrowing base of $950,000 and outstanding indebtedness on this loan of $950,000, which is classified as a current liability as it reaches maturity on February 13, 2013.

At September 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 covenants. We are not in default on any principal, interest or sinking fund payment.


Table of Contents

At September 30, 2012, our accounts receivable totaled $1,653,237, compared to $1,872,067 at December 31, 2011, a $218,830 or 11.7% decrease. This was primarily due to lower oil and gas receivables due to a decline in natural gas production and prices at September 30, 2012 when compared to the year-end at December 31, 2011. At September 30, 2012, our accounts payable and accrued expenses totaled $4,201,486, a decrease of $341,255 or 7.5% 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 $136,971 for the nine month period ended September 30, 2012 and net cash provided by operating activities totaled $2,174,182 for the nine month period ended September 30, 2011. This $2,311,153 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 $773,231, and $2,412,153 for the nine month periods ended September 30, 2012 and 2011, respectively. This decrease in capital acquisition costs was due to the drilling of five wells during the period in 2011 while there was no drilling of new wells during the period in 2012. During the nine month period in 2012, Royale also received proceeds of $1,737 relating to the 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 $466,860 and provided $701,489 for the nine month period ended September 30, 2012 and 2011, respectively. This difference was primarily due to principal payments totaling $1,800,000 on the Company's letter of credit facility with Texas Capital Bank, during the period on 2012. During first nine 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 $299,500. Additionally during the period, Royale received proceeds of $1,033,640 and issued 212,320 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 nine 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 2011 exercises.

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