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ROYL > SEC Filings for ROYL > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for ROYALE ENERGY INC


15-May-2013

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 first quarter of 2013, we had a net loss of $1,355,797 compared to net loss of $1,366,855 during the first quarter of 2012, an $11,058 change. Total revenues for the first quarter in 2013 were $471,666, a decrease of $229,912 or 32.8% from the total revenues of $701,578 during the period in 2012. The lower net profits and revenues were the result of a decrease in oil and natural gas production volumes and lower supervisory fees during the quarter in 2013, when compared to 2012.

In the first quarter of 2013, revenues from oil and gas production decreased $165,999 or 33.4% to $330,895 from the 2012 first quarter revenues of $496,894. This decrease was due to lower natural gas production, stemming from the natural declines of our existing wells and pipeline issues in one of our main producing fields. During February 2013, PG&E shut down the pipeline operations in our Lonestar field for approximately two weeks, due to issues with the pipeline oderizer. The net sales volume of natural gas for the quarter ended March 31, 2013, was approximately 88,530 Mcf with an average price of $3.48 per Mcf, versus 169,371 Mcf with an average price of $2.63 per Mcf for the first quarter of 2012. This represents a decrease in net sales volume of 80,841 Mcf or 47.7%. The net sales volume for oil and condensate (natural gas liquids) production was 280 barrels with an average price of $87.67 per barrel for the first three months of 2013, compared to 527 barrels at an average price of $94.64 per barrel for the first three months in 2012. This represents a decrease in net sales volume of 247 barrels, or 46.9%.

Oil and natural gas lease operating expenses decreased by $2,688 or 1.0%, to $292,822 for the quarter ended March 31, 2013, from $295,510 for the quarter in 2012. This difference was mainly due a decrease in compression charges due to the lower production volumes during the period in 2013.

For the quarter ended March 31, 2013, turnkey drilling and development costs decreased $27,257 or 38.7% to $43,143 in 2013 from $70,400 during the quarter in 2012. The costs incurred during the periods in 2013 and 2012 were carryover expenses from wells drilled during December 2012 and 2011, respectively. During the first three months of 2013 and 2012 we did not drill any new wells, due to the lower overall natural gas commodity prices. Thus far in 2013, we have processed permits on two wells in California, which we expect to drill during the second quarter of 2013.

The aggregate of supervisory fees and other income was $140,771 for quarter ended March 31, 2013, a decrease of $63,913 or 31.2% from $204,684 during the period in 2012. This decrease was the result of lower overhead rates during the period in 2013, due to lower production volumes.

Depreciation, depletion and amortization expense decreased to $221,360 from $363,462, a decrease of $142,102 or 39.1% for the quarter ended March 31, 2013, as compared to the same period in 2012. The depletion rate is calculated using production as a percentage of reserves. This decrease in depreciation expense was mainly due to a lower depletion rate because of lower production volumes during 2012.

General and administrative expenses decreased by $159,939 or 15.7% from $1,019,952 for the quarter ended March 31, 2012, to $860,013 for the period in 2013. This decrease was primarily due to lower employee related compensation expenses during the period in 2013, due to continued cost control measures. Marketing expense for the quarter ended March 31, 2013, decreased $116,593, or 75.6%, to $37,626, compared to $154,219 for the same period in 2012. 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 $171,631 for the period, compared to $270,303 for the same period in 2012, a $98,672 or 36.5% decrease. The decrease in legal and accounting expense was a result of a litigation settlement reached during the period in 2012, resulting in lower legal fees during the period in 2013.


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During 2011, we began a new seismic survey in Northern California of which 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. There were no Geological and Geophysical expenses in the first quarter of 2013. 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 increased to $200,868 for the quarter ended March 31, 2013, from $32,738 for the same period in 2012, a $168,130, or 513.6% increase. This increase was mainly due to the interest on a new convertible note payable obtained during the fourth quarter of 2012. For the first quarter in 2013, there was no income tax benefit or expense, as the Company has recorded a full valuation allowance against all deferred tax assets at December 31, 2012. For the same period in 2012, we had an income tax benefit of $558,617 due to net operating loss.

Capital Resources and Liquidity

At March 31, 2013, Royale Energy had current assets totaling $ 4,670,838 and current liabilities totaling $14,217,474, a $9,546,636 working capital deficit. We had cash and cash equivalents at March 31, 2013, of $1,639,071 compared to $1,489,930 at December 31, 2012.

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. The scheduled maturity date for the loan was February 13, 2013. During January 2013, the balance of $350,000 on this credit facility was paid in full. In February 2013, the revolving credit agreement matured.

In October 2012, the Company obtained $3 million from sale of a convertible note. See, The Company's Prospectus Supplement filed pursuant to Rule 424(b) on October 29, 2012, and the Company's Form 8-K filed on October 29, 2012. The Company used these proceeds for general corporate purposes, including the reduction of outstanding bank debt and for capital expenditures on oil and gas development. The note may, at the Company's option, be repaid by converting the interest and principal amounts due to common stock, thus reducing the Company's cash needs to service its debt. At March 31, 2013, the net outstanding balance of this note was $1,253,418.

At March 31, 2013, our accounts receivable totaled $1,377,805, compared to $3,969,160 at December 31, 2012, a $2,591,355 or 65.3% decrease. This was primarily due to an approximately $2,500,000 receivable, as part of the sale of common stock sold at year end December 2012. This common stock receivable was collected on January 4, 2013. At March 31, 2013, our accounts payable and accrued expenses totaled $4,247,908, a decrease of $684,560 or 13.9% from the accounts payable at December 31, 2012, of $4,932,468, mainly due to a decrease in payables related drilling costs for wells that were drilled during December 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 2013 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 $401,190 and $303,522 for the three month period ended March 31, 2013 and 2012, respectively. This $97,668 or 32.2% increase in cash provided was mainly due to the collection of accounts receivable and cost control measures during the quarter in 2013.

Investing Activities. Net cash used by investing activities, primarily in capital acquisitions of oil and gas properties, amounted to $90,384 and $344,584 for the three month period ended March 31, 2013 and 2012, respectively. This decrease was due to lower drilling completion costs during the quarter in 2013, as the Company completed one well begun at the end of 2012. During the first quarter of 2012, Royale also received proceeds of $1,307 relating to a sale of stock in 2012.

Financing Activities. Net cash used by financing activities totaled $161,655 in the first quarter of 2013, while $185,838 was provided by financing activities for the three month period ended March 31, 2012. During the quarter ended March 31, 2013, Royale received proceeds of $1,021,668 and issued 500,000 shares of its common stock relating to its market equity offering program. 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.


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