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ROYL > SEC Filings for ROYL > Form 10-Q on 13-May-2014All Recent SEC Filings

Show all filings for ROYALE ENERGY INC

Form 10-Q for ROYALE ENERGY INC


13-May-2014

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 2014, we had a net loss of $767,105 compared to net loss of $1,234,474 during the first quarter of 2013, a $467,369 improvement. Total revenues for the first quarter in 2014 were $979,031, an increase of $507,365 or 107.6% from the total revenues of $471,666 during the period in 2013. The lower net loss and higher revenues were the result of increases in both natural gas prices and production volumes during the quarter in 2014, when compared to 2013.

In the first quarter of 2014, revenues from oil and gas production increased $494,661 or 149.5% to $825,556 from the 2013 first quarter revenues of $330,895. This increase was due to higher natural gas commodity prices and increased production, as several new wells drilled at the end of 2013 and beginning of 2014 were brought online. The net sales volume of natural gas for the quarter ended March 31, 2014, was approximately 148,323 Mcf with an average price of $5.39 per Mcf, versus 88,530 Mcf with an average price of $3.48 per Mcf for the first quarter of 2013. This represents an increase in net sales volume of 59,793 Mcf or 67.5%. The net sales volume for oil and condensate (natural gas liquids) production was 280 barrels with an average price of $92.80 per barrel for the first three months of 2014, compared to 280 barrels at an average price of $87.67 per barrel for the first three months in 2013.

Oil and natural gas lease operating expenses increased by $186,327 or 69.7%, to $453,536 for the quarter ended March 31, 2014, from $267,209 for the quarter in 2013. This difference was mainly due to increased plugging and abandonment expenses and increased compression charges resulting from higher production volumes during the period in 2014. Delay rental costs decreased by $6,119 or 23.9%, to $19,494 for the quarter in 2014 from $25,613 for the same period in 2013.

The aggregate of supervisory fees and other income was $153,475 for quarter ended March 31, 2014, an increase of $12,704 or 9% from $140,771 during the period in 2013. This increase was the result of higher overhead rates during the period in 2014, stemming from higher production volumes.

Depreciation, depletion and amortization expense increased to $89,826 from $63,281, an increase of $26,545 or 42% for the quarter ended March 31, 2014, as compared to the same period in 2013. The depletion rate is calculated using production as a percentage of reserves. This increase in depreciation expense was mainly due to a higher depletion rate as production volumes were higher during the period.

General and administrative expenses decreased by $24,952 or 2.9% from $860,013 for the quarter ended March 31, 2013, to $835,061 for the period in 2014. This decrease was primarily due to lower employee related compensation expenses during the period in 2014, stemming from continued cost control measures. Marketing expense for the quarter ended March 31, 2014, increased $57,570, or 153%, to $95,196, compared to $37,626 for the same period in 2013. 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 increased to $218,652 for the period, compared to $171,631 for the same period in 2013, a $47,021 or 27.4% increase. The increase in legal and accounting expense was a result of higher audit and tax fees paid during the period in 2014 when compared to the same period in 2013.

At March 31, 2014, Royale Energy had a Deferred Drilling Obligation of $6,406,279. During this period, we disposed of $385,153 of these obligations upon completing the drilling of one well, while incurring expenses of $404,186, resulting in a loss of $19,033. In the same period in 2013, there were no wells drilled, but an additional $79,899 of expenses was incurred on wells drilled during the previous period. During the second quarter 2014, Royale expects to drill three wells, disposing of an additional $2,045,678 of deferred drilling obligation in the second quarter of 2014.


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Interest expense decreased to $15,338 for the quarter ended March 31, 2014, from $200,868 for the same period in 2013, a $185,530, or 92.4% decrease. This decrease resulted from a reduction of outstanding indebtedness after repayment during 2013 of a convertible note.

Capital Resources and Liquidity

At March 31, 2014, Royale Energy had current assets totaling $6,966,128 and current liabilities totaling $11,736,381, a $4,770,253 working capital deficit. We had cash and cash equivalents at March 31, 2014, of $3,664,400 compared to $4,878,233 at December 31, 2013.

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. At March 31, 2013, the net outstanding balance of this note was $1,253,418. During 2013, Royale repaid the note by paying a portion of the principal and interest in cash and by exercising the conversion feature to convert a portion of the principal and interest to common stock, as of September 30, 2013, this note was paid in full.

In December of 2013, Royale purchased an office building valued at $2,000,000, of which $500,000 was paid in cash on the date of purchase, and $1,500,000 was borrowed from American West Bank, with a note secured by the property being purchased. The note carries an interest rate of 5.75% until paid in full. Royale will pay this loan in 119 regular payments of $9,525 each and one balloon payment estimated at $1,150,435. Royale's first payment was due February 1, 2014, and all subsequent payments are due on the same day of each month after that. Royale's final payment will be due on January 1, 2024, and will be for all principal and all accrued interest not yet paid. Payments include principal and interest. At March 31, 2014, the outstanding balance of this note was $1,496,279.

At March 31, 2014, our accounts receivable totaled $2,331,501, compared to $1,680,792 at December 31, 2013, a $650,709 or 38.7% increase. This was primarily due to higher oil and gas revenue receivables due to higher commodity prices and increased production during the period. At March 31, 2014, our accounts payable and accrued expenses totaled $5,300,541, a decrease of $31,782 or .6% from the accounts payable at December 31, 2013, of $5,332,323, mainly due to payments of accounts payable during the period.

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 foreseeable future 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 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 $1,034,492 and provided by operating activities $444,333 for the three month periods ended March 31, 2014 and 2013, respectively. This $1,478,825 difference in cash was mainly due to increases in accounts receivable during the period in 2014, due to higher oil and natural gas revenue receivables.

Investing Activities. Net cash used by investing activities, primarily in capital acquisitions of oil and gas properties, amounted to $175,620 and $133,527 for the three month periods ended March 31, 2014 and 2013, respectively. This increase was due to higher drilling obligation costs during the quarter in 2014, as the Company completed one well while no wells were completed during the period in 2013.

Financing Activities. Net cash used by financing activities totaled $3,721 in the first quarter of 2014, which were principal payments on the Company's long-term debt; while $161,665 was used by financing activities for the three month period ended March 31, 2013. 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, while payments of $1,183,333 were made on the Company's convertible note payable.


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