Attached files
| file | filename |
|---|---|
| EX-32.2 - ROYALE ENERGY FUNDS, INC | re32_2ex.htm |
| EX-32.1 - ROYALE ENERGY FUNDS, INC | re32_1ex.htm |
| EX-31.1 - ROYALE ENERGY FUNDS, INC | re31_1ex.htm |
| EX-31.2 - ROYALE ENERGY FUNDS, INC | re31_2ex.htm |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the Quarterly Period Ended March 31, 2011
|
Commission File No. 000-22750
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ROYALE ENERGY, INC.
(Exact name of registrant as specified in its charter)
|
California
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33-0224120
|
|
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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7676 Hazard Center Drive, Suite 1500
San Diego, CA 92108
(Address of principal executive offices)
(Zip Code)
619-881-2800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Check one:
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Large accelerated filer __
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Accelerated filer __
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Non-accelerated filer __
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Smaller reporting company X
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Indicate by check mark whether the registrant is a blank check company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At March 31, 2011, a total of 10,274,731 shares of registrant’s common stock were outstanding.
TABLE OF CONTENTS
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PART I
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FINANCIAL INFORMATION
|
1
|
|
Item 1.
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Financial Statements
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1
|
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and
Results of Operations
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12
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Item 3
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Quantitative and Qualitative Disclosures About Market Risk
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14
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Item 4
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Controls and Procedures
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15
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PART II
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OTHER INFORMATION
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15
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Item 1
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Legal Proceedings
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16
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Item 1A
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Risk Factors
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16
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Item 6.
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Exhibits
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16
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Signatures
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16
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-ii-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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ROYALE ENERGY, INC.
|
||||||||
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BALANCE SHEETS
|
||||||||
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March 31, 2011
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December 31, 2010
|
|||||||
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(Unaudited)
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(Audited)
|
|||||||
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ASSETS
|
||||||||
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Current Assets
|
||||||||
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Cash and Cash Equivalents
|
$4,037,578 | $4,630,722 | ||||||
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Accounts Receivable, net
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3,742,955 | 2,451,047 | ||||||
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Prepaid Expenses
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394,864 | 586,486 | ||||||
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Deferred Tax Asset
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496,312 | 541,442 | ||||||
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Inventory
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851,204 | 850,385 | ||||||
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Total Current Assets
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9,522,913 | 9,060,082 | ||||||
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Other Assets
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6,946 | 6,946 | ||||||
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Deferred Tax Asset-Noncurrent
|
4,495,145 | 4,495,145 | ||||||
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Oil and Gas Properties, at cost, (successful efforts basis),
|
||||||||
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Equipment and Fixtures
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11,880,833 | 10,258,240 | ||||||
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Total Assets
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$25,905,837 | $23,820,413 | ||||||
See notes to unaudited financial statements
-1-
|
ROYALE ENERGY, INC.
|
||||||||
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BALANCE SHEETS
|
||||||||
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March 31, 2011
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December 31, 2010
|
|||||||
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(Unaudited)
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(Audited)
|
|||||||
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LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
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Current Liabilities:
|
||||||||
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Accounts Payable and Accrued Expenses
|
$6,293,243 | $5,235,166 | ||||||
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Deferred Revenue from Turnkey Drilling
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4,463,607 | 3,866,319 | ||||||
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Total Current Liabilities
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10,756,850 | 9,101,485 | ||||||
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Noncurrent Liabilities:
|
||||||||
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Asset Retirement Obligation
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583,769 | 580,568 | ||||||
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Long-Term Debt, Net of Current Portion
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2,900,000 | 3,200,000 | ||||||
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Total Noncurrent Liabilities
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3,483,769 | 3,780,568 | ||||||
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Total Liabilities
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14,240,619 | 12,882,053 | ||||||
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Stockholders' Equity:
|
||||||||
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Common Stock, no par value, authorized 20,000,000 shares,
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||||||||
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10,594,601 and 10,307,350 shares issued; 10,561,982 and
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||||||||
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10,274,731 shares outstanding, respectively
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27,859,972 | 27,246,740 | ||||||
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Convertible preferred stock, Series AA, no par value,
|
||||||||
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147,500 shares authorized; 52,784 and 52,784 shares
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||||||||
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issued and outstanding, respectively
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154,014 | 154,014 | ||||||
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Accumulated Deficit
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(16,730,571 | ) | (16,807,424 | ) | ||||
|
Total Paid in Capital and Accumulated Deficit
|
11,283,415 | 10,593,330 | ||||||
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Less Cost of Treasury Stock 32,619 and 32,619 shares
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(179,376 | ) | (179,376 | ) | ||||
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Additional Paid in Capital
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561,179 | 524,406 | ||||||
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Total Stockholders' Equity
|
11,665,218 | 10,938,360 | ||||||
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Total Liabilities and Stockholders' Equity
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$25,905,837 | $23,820,413 | ||||||
See notes to unaudited financial statements
-2-
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ROYALE ENERGY, INC.
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STATEMENTS OF OPERATIONS
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||||||||
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FOR THE QUARTER ENDED MARCH 31, 2011 AND 2010
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||||||||
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2011
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2010
|
|||||||
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(Unaudited)
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(Unaudited)
|
|||||||
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Revenues:
|
||||||||
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Sale of Oil and Gas
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$1,437,559 | $790,781 | ||||||
|
Turnkey drilling
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1,195,871 | 724,828 | ||||||
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Supervisory Fees and Other
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201,726 | 133,370 | ||||||
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Total Revenues
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2,835,156 | 1,648,979 | ||||||
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Costs and Expenses:
|
||||||||
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General and Administrative
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1,047,794 | 941,045 | ||||||
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Turnkey Drilling and Development
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951,014 | 454,086 | ||||||
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Lease Operating
|
306,108 | 258,409 | ||||||
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Geological and Geophysical Expense
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41,909 | 0 | ||||||
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Legal and Accounting
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403,211 | 191,997 | ||||||
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Marketing
|
180,604 | 150,752 | ||||||
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Depreciation, Depletion and Amortization
|
529,447 | 239,685 | ||||||
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Total Costs and Expenses
|
3,460,087 | 2,235,974 | ||||||
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Gain on Sale of Assets
|
785,132 | 0 | ||||||
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Income (Loss) From Operations
|
160,201 | (586,995 | ) | |||||
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Other Income (Expense):
|
||||||||
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Interest expense
|
(38,218 | ) | (5,509 | ) | ||||
|
Income (Loss) Before Income Tax Expense
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121,983 | (592,504 | ) | |||||
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Income Tax Provision (Benefit)
|
45,130 | (219,989 | ) | |||||
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Net Income (Loss)
|
$76,853 | ($372,515 | ) | |||||
|
Basic Earnings Per Share:
|
||||||||
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Net Income available to common stock
|
$0.01 | ($0.04 | ) | |||||
|
Diluted Earnings Per Share
|
$0.01 | ($0.04 | ) | |||||
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Other Comprehensive Income
|
||||||||
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Unrealized Gain (Loss) on Equity Securities
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$0 | $156,480 | ||||||
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Other Comprehensive Income (Loss), before tax
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0 | 156,480 | ||||||
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Income Tax Expense (Benefit) Related to Items of
|
||||||||
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Other Comprehensive Income
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0 | 105,416 | ||||||
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Other Comprehensive Income, net of tax
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0 | 51,064 | ||||||
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Comprehensive Income (Loss)
|
$76,853 | ($321,451 | ) | |||||
See notes to unaudited financial statements
-3-
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ROYALE ENERGY, INC.
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STATEMENTS OF CASH FLOWS
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||||||||
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FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
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||||||||
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2011
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2010
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|||||||
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(Unaudited)
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(Unaudited)
|
|||||||
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CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||
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Net Income (Loss)
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$76,853 | ($372,515 | ) | |||||
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Adjustments to Reconcile Net Income (Loss) to Net
|
||||||||
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Cash Provided (Used) by Operating Activities:
|
||||||||
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Depreciation, Depletion and Amortization
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529,447 | 239,685 | ||||||
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Gain on Sale of Assets
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(785,132 | ) | 0 | |||||
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Stock-Based Compensation, net of adjustments
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36,773 | 44,890 | ||||||
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Decrease (Increase) in:
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||||||||
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Accounts Receivable
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(1,291,908 | ) | 237,368 | |||||
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Prepaid Expenses and Other Assets
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190,803 | 269,194 | ||||||
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Increase (Decrease) in:
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||||||||
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Accounts Payable and Accrued expenses
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1,061,278 | (371,325 | ) | |||||
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Deferred Revenues - DWI
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597,288 | (44,405 | ) | |||||
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Deferred Income Tax expense (benefit)
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45,130 | (219,989 | ) | |||||
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Net Cash Provided (Used) by Operating Activities
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460,532 | (217,097 | ) | |||||
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CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
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Expenditures for Oil and Gas Properties
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||||||||
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and Other Capital Expenditures
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(1,591,907 | ) | (475,929 | ) | ||||
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Proceeds from Sale of Assets
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225,000 | 0 | ||||||
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Net Cash Used by Investing Activities
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(1,366,907 | ) | (475,929 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
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Proceeds from Long-Term Debt
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100,000 | 2,280,000 | ||||||
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Principal Payments on Long-Term Debt
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(400,000 | ) | (2,453,750 | ) | ||||
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Proceeds from Stock Option and Warrant Exercises
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613,231 | 0 | ||||||
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Net Cash Provided (Used) by Financing Activities
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313,231 | (173,750 | ) | |||||
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Net Decrease in Cash and Cash Equivalents
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(593,144 | ) | (866,776 | ) | ||||
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Cash at Beginning of Year
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4,630,722 | 3,835,282 | ||||||
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Cash at End of Period
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$4,037,578 | $2,968,506 | ||||||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
|
||||||||
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Cash Paid for Interest
|
$38,793 | $2,825 | ||||||
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Cash Paid for Taxes
|
$2,522 | $4,168 | ||||||
See notes to unaudited financial statements
-4-
ROYALE ENERGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 – In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting only of normally recurring adjustments, necessary to present fairly the Company’s financial position and the results of its operations and cash flows for the periods presented. The results of operations for the three month period are not, in management’s opinion, indicative of the results to be expected for a full year of operations. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report.
NOTE 2 – EARNINGS PER SHARE
Basic and diluted earnings (loss) per share are calculated as follows:
|
For the Three Months ended March 31, 2011
|
||||||||||||
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
||||||||||
|
Basic Earnings (Loss) Per Share:
|
||||||||||||
|
Net income available to common stock
|
$ | 76,853 | 10,336,255 | $ | 0.01 | |||||||
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Diluted Earnings (Loss) Per Share:
|
||||||||||||
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Effect of dilutive securities and stock
options
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0 | 823,659 | 0.00 | |||||||||
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Net income available to common stock
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$ | 76,853 | 11,159,914 | $ | 0.01 | |||||||
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For the Three Months ended March 31, 2010
|
||||||||||||
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Income
(Numerator)
|
Shares
(Denominator)
|
Per-Share
Amount
|
||||||||||
|
Basic Earnings (Loss) Per Share:
|
||||||||||||
|
Net income available to common stock
|
$ | (372,515 | ) | 10,240,487 | $ | (0.04 | ) | |||||
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Diluted Earnings (Loss) Per Share:
|
||||||||||||
|
Effect of dilutive securities and stock
options
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0 | 0 | 0.00 | |||||||||
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Net income available to common stock
|
$ | (372,515 | ) | 10,240,487 | $ | (0.04 | ) | |||||
For the three months ended March 31, 2010, Royale Energy had dilutive securities of 889,128. These securities were not included in the dilutive loss per share due to their anti-dilutive nature.
-5-
ROYALE ENERGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 3 – OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES
Oil and gas properties, equipment and fixtures consist of the following:
|
March 31, 2011
|
December 31, 2010
|
||||||||
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Oil and Gas
|
|||||||||
|
Producing properties, including drilling costs
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$ | 26,447,870 | $ | 25,637,549 | |||||
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Undeveloped properties
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580,696 | 512,573 | |||||||
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Lease and well equipment
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9,922,142 | 9,750,303 | |||||||
| 36,950,708 | 35,900,425 | ||||||||
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Accumulated depletion, depreciation & amortization
|
(25,753,209 | ) | (26,333,243 | ) | |||||
| 11,197,499 | 9,567,182 | ||||||||
|
Commercial and Other
|
|||||||||
|
Real estate, including furniture and fixtures
|
$ | 502,344 | $ | 502,344 | |||||
|
Vehicles
|
158,250 | 158,250 | |||||||
|
Furniture and equipment
|
1,294,006 | 1,285,744 | |||||||
| 1,954,600 | 1,946,338 | ||||||||
|
Accumulated depreciation
|
(1,271,266 | ) | (1,255,280 | ) | |||||
| 683,334 | 691,058 | ||||||||
| $ | 11,880,833 | $ | 10,258,240 | ||||||
|
The guidance set forth in the Continued Capitalization of Exploratory Well Costs paragraph of the Extractive Activities Topic of the FASB Accounting Standards Codification (ASC) requires that we evaluate all existing capitalized exploratory well costs and disclose the extent to which any such capitalized costs have become impaired and are expensed or reclassified during a fiscal period. We did not make any additions to capitalized exploratory well costs pending a determination of proved reserves during 2011 or 2010.
|
|||||||||
|
Three Months ended
March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Beginning balance at January 1
|
$ | 0 | $ | 0 | ||||
|
Additions to capitalized exploratory well costs pending the
determination of proved reserves
|
0 | 312,376 | ||||||
|
Reclassifications to wells, facilities, and equipment based on
the determination of proved reserves
|
(0 | ) | (312,376 | ) | ||||
|
Ending balance at March 31
|
$ | 0 | $ | 0 | ||||
-6-
ROYALE ENERGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 4 – STOCK BASED COMPENSATION
Royale Energy has a stock-based employee compensation plan. Effective January 1, 2006, the Company adopted the Compensation – Stock Compensation Topic of the FASB ASC, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards, consistent with that used for pro forma disclosures under the Topic.
During the March 2008 Board of Directors meeting, directors and executive officers of Royale Energy were each granted 45,000 options, a total of 360,000 options, to purchase common stock at an exercise or base price of $3.50 per share. These options are to be vested in three parts with 120,000 vesting on March 31, 2008, 2009, and 2010, respectively. The options were granted for a legal life of four years with a service period of three years. Royale Energy recorded compensation expense of $18,687 in the first three months of 2010 relating to these options. The total income tax benefits recognized in the income statement for these option arrangements were $6,933 in 2010. No compensation cost or tax benefit was recognized in 2011 relating to this option grant.
In November 2008, the Board of Directors granted the directors and executive officers of Royale Energy 95,000 shares of restricted common stock. The number of granted shares will double to 190,000 shares of common stock if Royale’s stock price reaches $15 a share during the period. On November 30, 2009 and November 30, 2010, 31,665 shares vested, and the remaining 31,670 or 63,340, depending on Royale’s stock price, will vest on November 30, 2011. Royale has recognized share-based compensation expense of $26,203 in the first quarters of 2011 and 2010 relating to this grant. During the same time period, Royale recognized $9,694 and $9,729 as a tax benefit relating to this stock grant for the quarters ending March 31, 2011 and 2010, respectively.
During the Board of Directors meeting held in December 2010, directors and executive officers of Royale Energy were each granted 50,000 stock options, a total of 400,000 options, to purchase common stock at an exercise or base price of $3.25 per share. These options are to vest in two parts; the first 200,000 options vested on January 1, 2011; the remaining 200,000 options will vest on January 1, 2012. The options were granted with a legal life of five years, and a service period of two years beginning January 1, 2011. During the first quarter of 2011, Royale recognized compensation costs of $10,570 and a tax benefit of $3,911 relating to this option grant.
-7-
ROYALE ENERGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 5 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has adopted the Subsequent Events Topic of the FASB Accounting Standards Codification. It establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Topic sets forth (1) The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Topic is effective for interim or annual financial periods ending after June 15, 2009. The adoption of this standard did not have a significant impact on the Company’s interim financial information.
SEC Rulemaking
On December 31, 2008, the SEC published the final rules and interpretations updating its oil and gas reporting requirements. Many of the revisions are updates to definitions in the existing oil and gas rules to make them consistent with the petroleum resource management system, which is a widely accepted standard for the management of petroleum resources that was developed by several industry organizations. Key revisions include the ability to include nontraditional resources in reserves, the use of new technology for determining reserves, permitting disclosure of probable and possible reserves, and changes to the pricing used to determine reserves in that companies must use a 12-month average price. The average is calculated using the first-day-of-the-month price for each of the 12 months that make up the reporting period. The SEC will require companies to comply with the amended disclosure requirements for registration statements filed after January 1, 2010, and for annual reports for fiscal years ending on or after December 15, 2009. The adoption of this rule did not have a significant impact on the Company’s financial statements.
NOTE 6 – FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
Royale Energy identifies reportable segments by product and country, although Royale Energy currently does not have foreign country segments. Royale Energy includes revenues from both external customers and revenues from transactions with other operating segments in its measure of segment profit or loss. Royale Energy also includes interest revenue and expense, DD&A, and other operating expenses in its measure of segment profit or loss.
Royale Energy's operations are classified into two principal industry segments. Following is a summary of segmented information for the three months ended March 31, 2011, and 2010:
-8-
|
Oil and Gas
|
||||||||||||
|
Producing
|
Turnkey
|
|||||||||||
|
and
|
Drilling
|
|||||||||||
|
Exploration
|
Services
|
Total
|
||||||||||
|
Three Months Ended March 31, 2011:
|
||||||||||||
|
Revenues from External Customers
|
$ | 1,437,559 | $ | 1,195,871 | $ | 2,633,430 | ||||||
|
Supervisory Fees
|
194,566 | 0 | 194,566 | |||||||||
|
Interest Revenue
|
0 | 7,160 | 7,160 | |||||||||
|
Interest Expense
|
19,109 | 19,109 | 38,218 | |||||||||
|
Operating Expenses for Segment Assets
|
1,204,106 | 1,726,531 | 2,930,640 | |||||||||
|
Depreciation, Depletion and Amortization
|
502,975 | 26,472 | 529,447 | |||||||||
|
Gain on Sale of Assets
|
785,132 | 0 | 785,132 | |||||||||
|
Income Tax Expense (Benefit)
|
255,673 | (210,543 | ) | 45,130 | ||||||||
|
Total Assets
|
$ | 24,610,545 | $ | 1,295,292 | $ | 25,905,837 | ||||||
|
Net Income (Loss)
|
$ | 435,391 | $ | (358,538 | ) | $ | 76,853 | |||||
-9-
|
Oil and Gas
|
||||||||||||
|
Producing
|
Turnkey
|
|||||||||||
|
and
|
Drilling
|
|||||||||||
|
Exploration
|
Services
|
Total
|
||||||||||
|
Three Months Ended March 31, 2010:
|
||||||||||||
|
Revenues from External Customers
|
$ | 790,781 | $ | 724,828 | $ | 1,515,609 | ||||||
|
Supervisory Fees
|
131,131 | 0 | 131,131 | |||||||||
|
Interest Revenue
|
0 | 2,239 | 2,239 | |||||||||
|
Interest Expense
|
2,755 | 2,754 | 5,509 | |||||||||
|
Operating Expenses for Segment Assets
|
926,904 | 1,069,385 | 1,996,289 | |||||||||
|
Depreciation, Depletion and Amortization
|
227,701 | 11,984 | 239,685 | |||||||||
|
Income Tax (Benefit)
|
(87,419 | ) | (132,570 | ) | (219,989 | ) | ||||||
|
Total Assets
|
$ | 21,663,646 | $ | 1,140,192 | $ | 22,803,838 | ||||||
|
Net Loss
|
$ | (148,029 | ) | $ | (224,486 | ) | $ | (372,515 | ) | |||
NOTE 7 – FAIR VALUE MEASUREMENTS
According to Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification, assets and liabilities that are measured at fair value on a recurring and nonrecurring basis in periods subsequent to initial recognition, the reporting entity shall disclose information that enable users of its financial statements to assess the inputs used to develop those measurements and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings for the period.
In January 2000, Royale Energy received 96,000 shares (as adjusted for a later stock split) in a new start up company (the “Settlement Stock”) as part of a settlement in an action filed against a former consultant. At the time of the settlement, the value of the Settlement Stock was undeterminable because there was no market for the start-up’s stock. In September 2009, issuer of the Settlement Stock conducted an initial public offering of stock, and a market for its shares was established. At March 31, 2010, the fair value of these shares was $1,156,800 and they were classified as available for sale securities. The fair value was determined using the number of shares owned as of the last day of the reporting period multiplied by the market price of the Settlement Stock on that day. For the quarter ended March 31, 2010, an unrealized holding gain
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of $51,064 was recorded in the other comprehensive income section of the Statement of Operations. The unrealized holding gain included the income tax effect of $105,416. By September 30, 2010, the Company had sold all remaining shares of the Settlement Stock.
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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 2011, we achieved net income of $76,853 compared to a net loss of $372,515 during the first quarter of 2010, a $449,368 improvement. Total revenues for the first quarter in 2011 were $2,835,156, an increase of $1,186,177 or 71.9% from the total revenues of $1,648,979 during the period in 2010. The higher net profits and revenues was the result of increases in both natural gas production and in turnkey drilling revenues due to drilling of an additional well during the quarter in 2011, when compared to 2010.
In the first quarter of 2011, revenues from oil and gas production increased $646,778 or 81.8% to $1,437,559 from the 2010 first quarter revenues of $790,781. This increase was due to higher natural gas production as one well, drilled during the fourth quarter of 2010, was brought online during the first quarter in 2011. The net sales volume of natural gas for the quarter ended March 31, 2011, was approximately 342,092 Mcf with an average price of $4.04 per Mcf, versus 125,826 Mcf with an average price of $5.27 per Mcf for the first quarter of 2010. This represents an increase in net sales volume of 216,266 Mcf or 171.9%. The net sales volume for oil and condensate (natural gas liquids) production was 640 barrels with an average price of $88.54 per barrel for the first three months of 2011, compared to 1,839 barrels at an average price of $69.71 per barrel for the three months in 2010. This represents a decrease in net sales volume of 1,199 barrels, or 65.2%.
Oil and natural gas lease operating expenses increased by $47,699 or 18.5%, to $306,108 for the quarter ended March 31, 2011, from $258,409 for the quarter in 2010. This increase was mainly due to higher transportation costs stemming from an increased production during the period in 2011.
For the quarter ended March 31, 2011, turnkey drilling revenues increased $471,043 or 65.0% to $1,195,871 from $724,828 in the same quarter in 2010. We also had a $496,928 or 109.4% increase in turnkey drilling and development costs to $951,014 in 2011 from $454,086 in 2010. In the course of the first three months of 2011 and 2010, Royale drilled two wells and one well in California, respectively. As the result, turnkey drilling revenues and costs increased during the period in 2011. Thus far in 2011, we have processed permits on several wells in California, and
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we expect to participate in the drilling of approximately two wells during the second quarter of 2011.
The aggregate of supervisory fees and other income was $201,726 for quarter ended March 31, 2011, an increase of $68,356 (51.3%) from $133,370 during the period in 2010. This increase was the result of an increase in pipeline and compressors revenues generated from the increase in natural gas production.
Depreciation, depletion and amortization expense increased to $529,447 from $239,685, an increase of $289,762 (120.9%) for the quarter ended March 31, 2011, as compared to the same period in 2010. This increase in depletion expense was mainly due to a higher depletion rate of our oil and natural gas properties resulting from an increase in production in 2011.
General and administrative expenses increased by $106,749 or 11.3%, from $941,045 for the quarter ended March 31, 2010, to $1,047,794 for the period in 2011. This increase was primarily due to increased employee related costs. Marketing expense for the quarter ended March 31, 2011, increased $29,852, or 19.8%, to $180,604, compared to $150,752 for the same period in 2010. 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 $403,211 for the period, compared to $191,997 for the same period in 2010, a $211,214 or 110.0% increase. The increase in legal and accounting expense was a result of higher legal fees in 2011 primarily related to the conclusion of the Mountain West litigation.
During the three months ended March 31, 2011, Royale sold its working interest in two separate non-core properties resulting in a gain of $785,132. The properties were located in Kern County, California and Gaines County, Texas.
Interest expense increased to $38,218 for the quarter ended March 31, 2011, from $5,509 for the same period in 2010, a $32,709, or 593.7% increase. This was due to an increase in the usage of our bank line of credit. For the first quarter in 2011, we had income tax expense of $45,130 due to a net operating profit. However, for the same period in 2010, we had an income tax benefit of $219,989 due to a net operating loss.
Capital Resources and Liquidity
At March 31, 2011, Royale Energy had current assets totaling $9,522,913 and current liabilities totaling $10,756,850, a $1,233,937 working capital deficit. We had cash and cash equivalents at March 31, 2011, of $4,037,578 compared to $4,630,722 at December 31, 2010.
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
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Energy may borrow, repay, and reborrow funds as necessary. At March 31, 2011, we had a current borrowing base of $2,900,000 and outstanding indebtedness on this loan of $2,900,000.
At March 31, 2011, we were in compliance with all financial covenants of our loan agreement with the bank, and we are not in default on any principal, interest or sinking fund payment.
At March 31, 2011, our accounts receivable totaled $3,742,955, compared to $2,451,047 at December 31, 2010, a $1,291,908 (52.7%) increase. This was primarily due a receivable of approximately $600,000 from the sale of certain oil and natural gas properties that occurred in the first quarter of 2011. Additionally, the increase in oil and natural gas production during the first three months of 2011 caused our revenue receivable balance to increase. At March 31, 2011, our accounts payable and accrued expenses totaled $6,293,243, an increase of $1,058,077 or 20.2% from the accounts payable at December 31, 2010, of $5,235,166, mainly due to the drilling of a well at the end of the first quarter of 2011.
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 2011 and do not foresee any liquidity demands that cannot be met from cash flow or financing activities.
Operating Activities. For the three months ended March 31, 2011, cash provided by operating activities totaled $460,532 compared to cash used by operating activities of $217,097 for the same period in 2010, a $677,629 difference. This difference was mainly due to an increase in Direct Working Interest sales.
Investing Activities. Net cash used by investing activities, primarily in capital acquisitions of oil and gas properties, amounted to $1,366,907 and $475,929 for the three month period ended March 31, 2011 and 2010, respectively. This rise in capital acquisition costs was the result of drilling one more well during the first three months of 2011 than 2010. During the first quarter of 2011, Royale also received proceeds of $225,000 relating to a sale of certain oil and natural gas properties in Kern County, California. As part of the sale, Royale retained an overriding royalty interest in the acreage.
Financing Activities. For the three months ended March 31, 2011, cash provided by financing activities amount to $313,231 compared to cash used by financing activities of $173,750 for the same period in 2010. During the first three months of 2011, several warrants were exercised in exchange for shares of Royale’s common stock. Royale received $613,231 and issued 268,811 shares of its common stock relating to these exercises.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our major market risk exposure relates to pricing of oil and gas production. The prices we receive for oil and gas are closely related to worldwide market prices for crude oil and local spot
prices paid for natural gas production. Prices have been volatile for the last several years, and we expect that volatility to continue. Monthly average natural gas prices ranged from a low of $3.96 per Mcf to a high of $4.29 per Mcf for the first three months of 2011. We have not entered
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into any hedging or derivative agreements to limit our exposure to changes in oil and gas prices or interest rates.
Item 4. Controls and Procedures
As of March 31, 2011, an evaluation was performed under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. These controls and procedures are based on the definition of disclosure controls and procedures in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2011.
No changes occurred in our internal control over financial reporting during the three months ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
National Fuel Corporation (“NFC”) v. Royale Energy, Inc., No. 080800735, Uintah County, Utah. NFC filed the current lawsuit seeking to challenge a settlement agreement from a prior lawsuit over management of property in which Royale is the 75% owner and operator and NFC is a non-operator with a 25% ownership. The last action taken was a scheduling conference on April 12, 2011. Pretrial motions will be heard on September 27, 2011; and the trail is scheduled for October 18-21, 2011. The case remains active and the Company intends to defend itself vigorously.
Mountain West Oil Field Services and Supplies, Inc. (Mountain West) v. Royale Energy, Inc., No. 2:10-cv-00865DN, United States District Court in Salt Lake City, Utah. The litigation involves actions for breach of contract for alleged failure to timely pay Mountain West, an oilfield service company, breach of implied covenant of good faith and fair dealing, unjust enrichment, promissory estoppels, and attorney’s fees and costs. Plaintiff has specified the amount of damages to be $355,850, together with interest, court costs and attorney’s fees as provided for by law. This case was settled in March 2011, and as part of the settlement, its terms and agreements are confidential.
Douglas Jones v. Royale Energy, Inc., et.al.
On July 1, 2010, Douglas Jones filed a lawsuit against the Company in the Circuit Court, 17th Judicial District, Broward County, Florida. Mr. Jones was an independent contractor handling certain aspects of sales for the Company prior to July 2, 2008. He asserts that he is entitled to an unspecified amount for commissions and expenses. The Company denies that any money is owed to Mr. Jones, and intends to defend the lawsuit vigorously. On August 16, 2010, the Company filed a motion to dismiss the lawsuit for lack of jurisdiction in the Florida courts. No
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date has been set for a hearing on the motion, and no opposition has been filed. Nothing further has occurred in the action, and no discovery has taken place.
Item 1A Risk Factors
Please review the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 6 Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32.1 18 U.S.C. § 1350 Certification
32.2 18 U.S.C. § 1350 Certification
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ROYALE ENERGY, INC.
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Date: May 06, 2011
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/s/ Donald H. Hosmer
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Donald H. Hosmer, Co-President and Co-Chief Executive Officer
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Date: May 06, 2011
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/s/ Stephen M. Hosmer
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Stephen M. Hosmer, Co-President, Co-Chief Executive Officer, and Chief Financial Officer
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