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ROYL > SEC Filings for ROYL > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for ROYALE ENERGY INC

Form 10-Q for ROYALE ENERGY INC


5-Aug-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 six months ended June 30, 2013, we had net income of $549,798 compared to a net loss of $2,683,579, during the same period in 2012, a $3,233,377 improvement. Total revenues for the first six months of 2013 were $2,006,701, an increase of $769,310 or 62.2% from the total revenues of $1,237,391 during the same period in 2012. For the quarter ended June 30, 2013, we had a net income of $1,905,595 compared to a net loss of $1,316,724 for the same period in 2012. The higher net profits and revenues were primarily the result of the sale of a portion of our oil and gas leases in Alaska, see our Form 8-K filed on May 24, 2013, and increased drilling during the period in 2013, when compared to 2012.

During the first six months of 2013, revenues from oil and gas production decreased $79,848 or 9.2% to $787,996 from the 2012 six month revenues of $867,844. 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 in the pipeline in our Lonestar field for approximately two weeks for non-routine maintenance. The net sales volume of natural gas for the six months ended June 30, 2013, was approximately 197,462 Mcf with an average price of $3.73 per Mcf, versus 315,421 Mcf with an average price of $2.49 per Mcf for the period in 2012. This represents a decrease in net sales volume of 117,959 Mcf or 37.4%. The net sales volume for oil and condensate (natural gas liquids) production was 566 barrels with an average price of $92.82 per barrel for the first six months of 2013, compared to 855 barrels at an average price of $94.13 per barrel for the same period in 2012. This represents a decrease in net sales volume of 289 barrels, or 33.8%. For the quarter ended June 30, 2013, revenues from oil and gas production increased $86,151 or 23.2% to $457,101 from the 2012 second quarter revenues of $370,950. During the second quarter 2013, we produced approximately 108,931 Mcf with an average price of $3.94 compared to 146,050 Mcf produced during the same period in 2012 with an average price of $2.33 per Mcf which represents a 37,118 Mcf or 25.4% decrease in net sales volume. For the second quarter in 2013, oil and condensate production decreased approximately 41 barrels or 12.7%, from 328 barrels produced during the period in 2012 to 286 barrels produced in the same period in 2013.

Oil and natural gas lease operating expenses decreased by $72,381 or 11.9%, to $533,950 for the six months ended June 30, 2013, from $606,331 for the same period in 2012. For the second quarter in 2013, lease operating expenses decreased $69,693 or 22.4% from the same period in 2012. These decreases were mainly due to lower overhead, compression and transportation charges related to the lower production volumes during the period in 2013.

For the six months ended June 30, 2013, turnkey drilling revenues were $893,667. This was due to the drilling of one California well during the second quarter of 2013. During first six months in 2012, we did not drill any new wells due to lower overall natural gas commodity prices. For the six months ended June 30, 2013, turnkey drilling and development costs increased $351,685 or 185% to $541,843 in 2013 from $190,158 during the period in 2012. The costs incurred during the periods in 2013 and 2012 were for the well drilled in 2013 along with carryover expenses from wells drilled during December 2012 and 2011. During the second quarter in 2013, we processed permits on two wells in California, which we expect to drill during the third quarter of 2013.

The aggregate of supervisory fees and other income was $325,038 for six months ended June 30, 2013, a decrease of $44,509 or 12% from $369,547 during the period in 2012. This decrease was the result of lower overhead rates during the period in 2013 due to lower production volumes. During the second quarter 2013, supervisory fees and other income increased $19,404, mainly due to higher drilling overhead and interest income.

Depreciation, depletion and amortization expenses decreased to $461,264 from $737,119, a decrease of $275,855 or 37.4% for the six months ended June 30, 2013, as compared to the same period in 2012. During the second quarter 2013, depreciation, depletion and amortization expenses decreased $133,753. 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 the prior year in 2012.


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General and administrative expenses decreased by $455,233 or 22.6% from $2,011,447 for the six months ended June 30, 2012, to $1,556,214 for the period in 2013. For the second quarter 2013, general and administrative expenses decreased $295,294 or 29.8%, when compared to the same period in 2012. These decreases were primarily due to lower employee related compensation expenses during the period in 2013, resulting from continued cost control measures. Marketing expense for the six months ended June 30, 2013, decreased $223,420, or 68.5%, to $102,721, compared to $326,141 for the same period in 2012. For the second quarter 2013, marketing expenses decreased $106,827 or 62.1%, when compared to the second quarter 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 $252,464 for the six months ended June 30, 2013, compared to $419,875 for the same period in 2012, a $167,411 or 39.9% decrease. For the second quarter 2013, legal and accounting expenses decreased $68,739 or 46%, when compared to the same period in 2012. The decreases in legal and accounting expense were a result of a litigation settlement reached during the period in 2012, resulting in lower legal fees during the period in 2013.

In the second quarter of 2013 we recorded a gain of $2,337,104 from the sale of a portion of our western block oil and gas leases in Alaska. During the period in 2013, we also recorded a gain of $40,000 on the sale of oil and gas leases in Texas and recorded a loss of $82,184 on the sale of surface casing previously included in inventory. During the same period in 2012, we recorded a gain of $1,737 on the sale of a non-oil and gas asset and recorded a write down of $62,744 on certain oil and gas inventory to its estimated current market value.

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 $422,686 during the first half of 2012. There were no Geological and Geophysical expenses recorded in the first half of 2013.

Interest expense increased to $303,367 for the six months ended June 30, 2013, from $68,362 for the same period in 2012, a $235,005, or 343.8% increase. This increase was due to the interest on a new convertible note payable obtained during the fourth quarter of 2012. For the six months 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 $1,103,783 due to net operating loss.

Capital Resources and Liquidity

At June 30, 2013, Royale Energy had current assets totaling $8,168,007 and current liabilities totaling $13,477,735, a $5,309,728 working capital deficit. We had cash and cash equivalents at June 30, 2013, of $3,499,489 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. In April 2013, 479,589 common shares were issued in lieu of the scheduled payment of $833,333. According to the note agreement, the note holders may elect to convert the principal balance into shares of the Company's common stock. During the second quarter 2013, the note holders submitted conversion notices to the Company, 340,410 common shares were issued for a reduction in the note principal of $926,630. At June 30, 2013, the net outstanding balance of this note was $401,371.

At June 30, 2013, our accounts receivable totaled $3,543,113, compared to $3,969,160 at December 31, 2012, a $426,047 or 10.7% decrease. This was due to an approximately $2,500,000 receivable, as part of the sale of common stock sold at year end December 2012, which was collected on January 4, 2013. Additionally, at June 30, 2013, we have an approximately $1,700,000 receivable as part of our lease sale in Alaska, which we expect to collect by the end of 2013. During the period in 2013, we also made payments of approximately $480,000 for deposits as collateral for various state and county bonds. At June 30, 2013, our accounts payable and accrued expenses totaled $4,498,964, a decrease of $433,504 or 8.8% from the accounts payable and accrued expenses 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, such as proceeds from our Alaska acreage sale, current Form S-3 filed with the SEC, and ongoing operations, as the Company continues to increase its well inventory.


Table of Contents

Operating Activities. Net cash used by operating activities totaled $1,266,987 and $54,334 for the six month period ended June 30, 2013 and 2012, respectively. This $1,212,653 difference in cash used was mainly due to the gain on sale of a portion of its Alaska leases of approximately $2.3 million during the period in 2013.

Investing Activities. Net cash provided by investing activities, primarily in capital acquisitions of oil and gas properties, amounted to $2,798,540 in the six month period ended June 30, 2013 and net cash used for the six month period ended June 30, 2012 was $377,882. This difference was primarily due to the sale of a portion of our leases in Alaska, from which we received proceeds of approximately $3,400,000, during the period in 2013. During the six month period in 2012, we received proceeds of $1,737 relating to a sale of stock.

Financing Activities. Net cash provided by financing activities totaled $478,006 in the first half of 2013, while $43,365 was used by financing activities for the six month period ended June 30, 2012. This difference in cash was mainly due to the proceeds received during the period in 2013 for common stock sales and warrant exercises. During the six months ended June 30, 2013, Royale received proceeds of $1,021,668 and issued 500,000 shares of its common stock relating to its market equity offering program. Also during the period in 2013, several warrants were exercised in exchange for shares of Royale's common stock, and we received $639,672 and issued 321,443 shares of our common stock relating to these exercises. These proceeds were added to working capital and used for ordinary operating expense. 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.

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