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ROYL > SEC Filings for ROYL > Form 10-Q on 21-Oct-2013All Recent SEC Filings

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Form 10-Q for ROYALE ENERGY INC


21-Oct-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 nine months ended September 30, 2013, we had net income of $1,143,365 compared to a net loss of $3,508,764, during the same period in 2012, a $4,652,129 improvement. Total revenues for the first nine months of 2013 were $5,136,357, an increase of $3,345,319 or 186.8% from the total revenues of $1,791,038 during the same period in 2012. For the quarter ended September 30, 2013, we had net income of $593,567 compared to a net loss of $825,185 for the same period in 2012, a $1,418,752 improvement. The higher net profits and revenues were the result of increased drilling and the sale of a portion of our oil and gas leases in Alaska, during the period in 2013. See our Current Report Form 8-K filed on May 24, 2013.

In the first nine months of 2013, revenues from oil and gas production increased $31,513 or 2.5% to $1,286,834 from 2012 revenues of $1,255,321. This increase was due to higher natural gas commodity prices received during the period in 2013. The net sales volume of natural gas for the nine months ended September 30, 2013, was approximately 330,599 Mcf with an average price of $3.67 per Mcf, versus 444,723 Mcf with an average price of $2.58 per Mcf for the first nine months of 2012. This represents a decrease in net sales volume of 114,124 Mcf or 25.7%. For the quarter ended September 30, 2013, revenues from oil and gas increased to $498,838 from $387,477 received during the same period in 2012. During the third quarter in 2013, we produced 133,138 Mcf with an average price of $3.57 per Mcf versus 129,303 Mcf produced during the same quarter in 2012 with an average price of $2.80 per Mcf, which represents an 3,835 Mcf or 3.0% increase in net sales volume. For the first nine months of 2013, revenues from oil and condensate (natural gas liquids) decreased $29,271 or 27.8% to $76,022 from 2012 nine month revenues of $105,293. The net sales volume for the nine month period in 2013 was 810 barrels with an average price of $93.89 per barrel, compared to 1,151 barrels with an average price of $91.46 per barrel for the period in 2012. This represents a decrease in net sales volume of 341 barrels, or 29.6%. For the third quarter of 2013, oil and condensate production decreased 53 barrels, or 17.9%, from 296 barrels produced in 2012 to 243 barrels produced in the same period in 2013.

Oil and natural gas lease operating expenses decreased by $18,501 or 2.1%, to $860,465 for the nine months ended September 30, 2013, from $878,966 for the same period in 2012. This was mainly due to lower overhead, compression and transportation charges related to the lower production volumes during the period in 2013. For the third quarter of 2013, lease operating expenses increased $53,880 or 19.8% over the same period in 2012, mainly due to higher plugging costs during the period in 2013.

For the nine months ended September 30, 2013, turnkey drilling revenues were $3,363,989 and turnkey drilling and development costs were $1,762,379. This was due to the drilling of three California wells during the period in 2013. During first nine months in 2012, we did not drill any new wells due to lower overall natural gas commodity prices. Also in the period in 2012, we had an adjustment to previously expensed drilling and development costs due to lower than anticipated completion costs for wells that commenced drilling prior to 2012. This resulted in an adjustment of ($153,549) in turnkey drilling and development costs. During the third quarter in 2013, we processed permits on three wells in California, which we expect to drill during the fourth quarter of 2013.

The aggregate of supervisory fees and other income was $485,534 for nine months ended September 30, 2013, a decrease of $50,183 or 9.4% from $535,717 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 third quarter 2013, supervisory fees and other income decreased $5,674 mainly due to lower pipeline and compressor fees as a result of lower natural gas production during the period in 2013.

Depreciation, depletion and amortization expenses decreased to $807,357 from $1,394,028, a decrease of $586,671 or 42.1% for the nine months ended September 30, 2013, as compared to the same period in 2012. During the third quarter 2013, depreciation, depletion and amortization expenses decreased $310,816. 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.


Table of Contents

General and administrative expenses decreased by $523,609 or 18.5% from $2,833,050 for the nine months ended September 30, 2012, to $2,309,441 for the period in 2013. For the third quarter 2013, general and administrative expenses decreased $68,376 or 8.3%, 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 nine months ended September 30, 2013, decreased $303,737, or 59.8%, to $204,565, compared to $508,302 for the same period in 2012. For the third quarter 2013, marketing expenses decreased $80,317 or 44.1%, when compared to the third 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 $278,973 for the nine months ended September 30, 2013, compared to $500,647 for the same period in 2012, a $221,674 or 44.3% decrease. For the third quarter 2013, legal and accounting expenses decreased $54,263 or 67.2%, 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.

During the period in 2013 we recorded a gain of $2,682,651 from the sale of a portion of our western block oil and gas leases in Alaska. In 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. Additionally in 2013, we recorded a write down of $39,185 on certain oil and gas inventory that no longer appeared viable. During the same period in 2012, we recorded a gain of $3,284 on the sale of a non-company owned stock 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 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 $423,459 and $24,997 during the first nine months of 2012 and 2013, respectively.

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 $46,311 and $202,127 were recorded in the first nine months of 2013 and 2012, respectively. These impairments were mainly due to various lease and land costs that were no longer viable.

Interest expense increased to $304,472 for the nine months ended September 30, 2013, from $87,401 for the same period in 2012, a $217,071, or 248.4% increase. This increase was due to the interest on a new convertible note payable obtained during the fourth quarter of 2012. For the nine months in 2013, there was no income tax benefit or expense, as the Company has been in a three year cumulative loss position and 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 $1,434,089 due to net operating loss.

Capital Resources and Liquidity

At September 30, 2013, Royale Energy had current assets totaling $7,354,663 and current liabilities totaling $11,535,359, a $4,180,696 working capital deficit. We had cash and cash equivalents at September 30, 2013, of $2,462.511 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 period in 2013, the note holders submitted conversion notices to the Company such that 787,055 common shares were issued for a reduction in the note principal of $1,666,666. As of September 30, 2013, this note was paid in full.


Table of Contents

At September 30, 2013, our accounts receivable totaled $3,700,285, compared to $3,969,160 at December 31, 2012, a $268,875 or 6.8% decrease. This was due in part 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 September 30, 2013, we have an approximately $1,975,000 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 $460,000 for deposits as collateral for various state and county bonds. At September 30, 2013, our accounts payable and accrued expenses totaled $4,286,513, a decrease of $645,955 or 13.1% 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, including ongoing operations as the Company continues to increase its well inventory, proceeds from our Alaska acreage sale, or additional sales of equity or debt securities pursuant to a Registration Statement on Form S-3 filed with the SEC.

Operating Activities. Net cash used by operating activities totaled $2,383,488 and $136,971 for the nine month period ended September 30, 2013 and 2012, respectively. This $2,246,517 increase in cash used was mainly due to the gain on sale of a portion of its Alaska leases of approximately $2.7 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 $2,874,104 in the nine month period ended September 30, 2013 and net cash used for the nine month period ended September 30, 2012 was $773,231. This difference was primarily due to the sale of a portion of our leases in Alaska, from which we received proceeds of approximately $4 million, during the period in 2013. Also during the period in 2013, we drilled three California wells resulting in expenditures of approximately $1.1 million. During the nine month period in 2012, we received proceeds of $1,737 relating to a sale of stock and completed wells that were begun in December 2011 resulting in expenditures of approximately $775,000.

Financing Activities. Net cash provided by financing activities totaled $481,965 in the first nine months of 2013, while $466,860 was used by financing activities for the nine month period ended September 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 nine months ended September 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 $643,630 and issued 323,253 shares of our common stock relating to these exercises. These proceeds were added to working capital and used for ordinary operating expense. 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 in 2012, 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.

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