| March 31, 2006 | December 31, 2005 |
| (Unaudited) | (Audited) |
LIABILITIES AND STOCKHOLDERS' EQUITY | | |
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Current Liabilities | | |
Accounts payable and accrued expenses | $ 8,175,796 | $ 7,375,161 |
Current portion of long-term debt | 299,755 | 90,746 |
Deferred revenue from turnkey drilling | 4,282,483 | 6,490,111 |
Total Current Liabilities | 12,758,054 | 13,956,018 |
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Long-Term Liabilities | | |
Asset retirement obligation | 248,623 | 245,627 |
Deferred income taxes | 3,892,048 | 3,892,048 |
Long-term debt, net of current portion | 5,840,000 | 6,630,598 |
Total Noncurrent Liabilities | 9,980,671 | 10,768,273 |
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Total Liabilities | 22,738,725 | 24,724,291 |
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Redeemable Preferred Stock | | |
Series A, convertible preferred stock, no par value, 259,250 shares authorized; 6,122 and 6,122 shares issued and outstanding respectively | 11,589 | 11,589 |
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Stockholders' Equity | | |
Common stock, no par value, authorized 10,000,000 shares, 7,948,688 and 7,859,223 issued; 7,948,688 and 7,859,223 shares outstanding, respectively | 19,500,374 | 19,500,374 |
Convertible preferred stock, Series AA, no par value, 147,500 shares authorized; 57,416 and 57,416 shares issued and outstanding, respectively | 167,979 | 167,979 |
Accumulated (Deficit) | (627,718) | (1,314,738) |
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Total paid in capital and accumulated deficit | 19,040,635 | 18,353,615 |
Less cost of treasury stock, 13,952 and 13,952 shares | (68,271) | (68,271) |
Paid in capital, treasury stock | 21,357 | 21,357 |
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Total Stockholders' Equity | 19,005,310 | 18,318,290 |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY: | $ 41,744,035 | $ 43,042,581 |
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Note 5 - Stock Based Compensation |
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In December 2004, the FASB issued SFAS No. 123R which requires all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value. The FASB concluded that companies can adopt the new standard in one of two ways: the modified prospective transition method, or the modified retrospective transition method. We adopted SFAS No. 123R during the first quarter of fiscal 2006 and use the modified prospective transition method. |
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At March 31, 2005 and 2006, Royale Energy had no unvested options outstanding, and adoption of SFAS No. 123R would have had no effect on compensation. On June 1, 2005, Royale Energy awarded shares of restricted common stock to certain of its employees pursuant to an incentive compensation plan. On that date, the Company's stock price was $5.66 per share. A total of 6,048 shares of vested restricted common stock were issued. The Company recognized $34,241 compensation expense in 2005. |
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Additionally, 12,102 shares of unvested stock were awarded with vesting dates in 2006 and 2007 for which compensation expense will be similarly recognized. |
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Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations |
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Results of Operations |
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For the first quarter of 2006, we had a net profit of $687,020 an $818,853 increase compared to the net loss of $131,833 during the first quarter of 2005. We can attribute this to an increase in turnkey drilling revenues, due to the drilling of six wells in the first quarter of 2006 versus four wells drilled in first quarter of 2005. Total revenues for the first quarter in 2006 were $7,383,723, an increase of $1,831,108 or 33% from the total revenues of $5,552,615 during the period in 2005. This increase was also due to higher turnkey drilling revenues. |
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In the first quarter of 2006, revenues from oil and gas production decreased by $76,713 or 3.3% to $2,281,869 from the 2005 first quarter revenues of $2,358,582, due to a decrease in natural gas production. The net sales volume of natural gas for the quarter ended March 31, 2006, was approximately 287,509 Mcf with an average price of $6.99 per Mcf, versus 370,126 Mcf with an average price of $5.97 per Mcf for the first quarter of 2005. This represents a decrease in net sales volume of 82,617 Mcf or 22.3%. This decrease was partially due to natural declines in production from existing wells, third party transportation interruptions and to the lack of new production caused by a delay in bringing some of our successful new wells online. The net sales volume for oil and condensate (natural gas liquids) production was 4,689 barrels with an average price of $57.82 per barrel for the first three months of 2006, compared to 3,659 barrels at an average price of $40.40 per barrel for the three months in 2005. This represents an increase in net sales volume of 1,030 barrels, or 28.1%. |
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Oil and natural gas lease operating expenses decreased by $122,532 or 17.3%, to $586,610 for the quarter ended March 31, 2006, from $709,142 for the quarter in 2005. This decrease was mainly due to lower plugging and workover costs in 2006 when compared to 2005. |
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For the quarter ended March 31, 2006, turnkey drilling revenues increased $1,873,066 or 64.5% to $4,777,610 from $2,904,544 in the same quarter in 2005. We also had a $432,479 or 17.1% increase in turnkey drilling and development costs to $2,963,915 in 2006 from $2,531,436 in 2005. The increases in turnkey drilling revenues and costs were mainly due to an increase in the number of wells drilled in 2006 when compared to 2005. We drilled six wells during the first quarter of 2006 versus four wells during the same period in 2005. |
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We periodically review our proved properties for impairment on a field-by-field basis and charge impairments of value to expense. Impairment losses of $97,851 were recorded in the first quarter of 2006, an increase of $89,669 or 1096% when compared to the same quarter in 2005. |
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The aggregate of supervisory fees and other income was $324,244 for quarter ended March 31, 2006, an increase of $34,755 (12%) from $289,489 during the period in 2005. This increase was due to higher supervisory fees from increased drilling. |
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Depreciation, depletion and amortization expense increased to $1,050,828 from $861,525, an increase of $189,303 (22%) for the quarter ended March 31, 2006, as compared to the same period in 2005. The depletion rate is calculated using production as a percentage of reserves. This increase in depletion expense was mainly due to the increase in our oil and gas assets due to capitalized drilling costs in 2005 and the first quarter of 2006. |
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General and administrative expenses increased by $126,585 or 12.1%, from $1,042,423 for the quarter ended March 31, 2005, to $1,169,008 for the period in 2006. This increase was due to higher outside consulting services, employee related costs and travel. Legal and accounting expense increased to $122,612 for the period, compared to $88,986 for period in 2005, a $33,626 or 37.8% increase, mainly due to an increase in legal fees. Marketing expense for the quarter ended March 31, 2006, decreased $108,870, or 33.1 %, to $219,657, compared to $328,527 for the period in 2005. Marketing expense varies from period to period according to the number of marketing events attended by personnel and their associated costs. |
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Interest expense increased to $124,204 for the quarter ended March 31, 2006, from $78,294 for the same period in 2005, a $45,910, or 58.6% increase. This increase was due to the higher interest rate on our commercial bank credit line, which increased from 6.5% at March 31, 2005 to 8.25% at March 31, 2006 and to an increase in the use of our line due to our increased drilling schedule. |
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For the first quarter of 2006 our income tax expense increased to $362,018 from $35,933 during the period in 2005, a $326,085 increase, mainly due to the increase in our net operating income. |
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Capital Resources and Liquidity |
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At March 31, 2006, Royale Energy had current assets totaling $9,915,422 and current liabilities totaling $12,758,054, a $2,842,632 working capital deficit. We had cash and cash equivalents at March 31, 2006, of $4,848,312 compared to $4,716,772 at December 31, 2005. During the quarter ended March 31, 2006, we repaid approximately $581,000 on our commercial bank credit line and loan. |
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We have a revolving line of credit under a loan agreement with Guaranty Bank, FSB, which is secured by all of our oil and gas properties. At March 31, 2006, we had outstanding indebtedness of $5,840,000, compared to $6,400,000 at December 31, 2005. Unused available credit from this revolving line of credit totaled approximately $665,974 at March 31, 2006. Our loan from Guaranty Bank, FSB, secured by our non-oil and gas real estate assets, had outstanding indebtedness of approximately $299,775 on March 31, 2006 compared to $321,344 at December 31, 2005. |
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At March 31, 2006, our accounts receivable totaled $3,135,426, compared to $4,221,601 at December 31, 2005, a $1,086,175 (25.7%) decrease, primarily due to a decrease in our oil and gas receivables for the period. At March 31, 2006, our accounts payable and accrued expenses totaled $8,175,796, an increase of $800,635 or 10.9% from the accounts payable at December 31, 2005, of $7,375,161, mainly due to our increased drilling during the period in 2006. |
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We ordinarily fund our operations and cash needs from cash flows generated from operations. We believe that we have sufficient liquidity for the remainder of 2006 and do not foresee any liquidity demands that cannot be met from cash flow from operations. |
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Operating Activities.For the quarter ended March 31, 2006, cash provided by operating activities totaled $2,462,804 compared to $84,383 for the same period in 2005, a $2,378,421 or 2,819% increase. This increase in cash provided was due to the increase in turnkey drilling revenue and the reduction in deferred revenues from turnkey drilling as we applied previously deferred revenues to pay for current drilling and development activity. |
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Investing Activities.Net cash used by investing activities, primarily in capital acquisitions of oil and gas properties, amounted to $1,749,695 for the period in 2006, compared to $3,978,369 used by investing activities for the same period in 2005, a $2,228,674 or 56% decrease in cash used. This was primarily due to a decrease in cash used for undeveloped properties and the drilling of lower cost wells during the period in 2006. |
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Financing Activities. For the quarter ended March 31, 2006, cash used by financing activities was $581,569 compared to $889,671 used by financing activities for the same period in 2005, a $308,102 or 34.6% decrease in cash used. This decrease was primarily due to our increasing the outstanding debt on our commercial bank loans during the period in 2006 when compared to 2005. |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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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 few years, and we expect that volatility to continue. Monthly average natural gas prices ranged from a low of $6.35 per mcf to a high of $8.10 per mcf for the first quarter of 2006. We have not entered into any hedging or derivative agreements to limit our exposure to changes in oil and gas prices or interest rates. |
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Item 4. Controls and Procedures |
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As of March 31, 2006, 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. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2006. |
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No significant changes occurred in our internal control over financial reporting during the quarter ended March 31, 2006. |
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Item 6. Exhibits |
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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. Section 1350 Certification |
32.2 18 U.S.C. Section 1350 Certification |
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Signatures |
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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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