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SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-Q |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended September 30, 2007 |
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ROYALE ENERGY, INC. |
(Exact name of registrant as specified in its charter) |
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California | 33-0224120 |
(State or other jurisdiction of | (I.R.S. Employer |
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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) |
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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 [ ] |
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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 __ | Accelerated Filer __ | Non-accelerated filer 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] |
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At September 30, 2007, a total of 7,918,659 shares of registrant's common stock were outstanding. |
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TABLE OF CONTENTS |
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PART I | FINANCIAL INFORMATION | 1 |
Item 1. | Financial Statements | 1 |
Item 2. | Management's Discussion and Analysis of Financial Condition and | 10 |
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 13 |
Item 4 | Controls and Procedures | 13 |
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PART II | OTHER INFORMATION | 14 |
Item 1 | Legal Proceedings | 14 |
Item 1A | Risk Factors | 14 |
Item 6. | Exhibits | 14 |
| Signatures | 14 |
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PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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ROYALE ENERGY, INC. |
BALANCE SHEETS |
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| September 30, 2007 | December 31, 2006 |
| (Unaudited) | (Audited) |
ASSETS |
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Current Assets |
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Cash and cash equivalents | $ 3,892,416 | $ 7,377,604 |
Accounts receivable | 2,970,838 | 2,906,290 |
Prepaid expenses | 849,676 | 2,301,267 |
Deferred tax asset | 195,615 | 195,615 |
Inventory | 355,014 | 401,521 |
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Total Current Assets | 8,263,559 | 13,182,297 |
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Investments | 6,946 | 6,946 |
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Oil and Gas Properties at cost, (successful efforts |
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basis), Equipment and Fixtures | 22,615,244 | 20,525,960 |
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TOTAL ASSETS: | $ 30,885,749 | $ 33,715,203 |
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See notes to Financial Statements |
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ROYALE ENERGY, INC. |
BALANCE SHEETS |
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| September 30, 2007 | December 31, 2006 |
| (Unaudited) | (Audited) |
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current Liabilities |
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Accounts payable and accrued expenses | $ 8,142,861 | $ 7,158,612 |
Current portion of long-term debt | 0 | 233,045 |
Deferred revenue from turnkey drilling | 5,686,290 | 5,018,261 |
Total Current Liabilities | 13,829,151 | 12,409,918 |
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Noncurrent Liabilities |
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Asset retirement obligation | 283,266 | 273,049 |
Deferred tax liability | 1,022,799 | 1,673,922 |
Long-term debt, net of current portion | 1,725,000 | 3,810,000 |
Total Noncurrent Liabilities | 3,031,065 | 5,756,971 |
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Total Liabilities | 16,860,216 | 18,166,889 |
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Stockholders' Equity |
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Common stock, no par value, authorized | 19,511,963 | 19,511,963 |
Convertible preferred stock, Series AA, no par | 167,979 | 167,979 |
Accumulated (Deficit) | (5,499,972) | (3,964,439) |
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Total paid in capital and accumulated deficit | 14,179,970 | 15,715,503 |
Less cost of treasury stock, 33,087 and 35,340 |
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Paid in capital, treasury stock | 26,575 | 24,863 |
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Total Stockholders' Equity | 14,025,533 | 15,548,314 |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY: | $ 30,885,749 | $ 33,715,203 |
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See notes to Financial Statements |
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ROYALE ENERGY, INC. |
STATEMENTS OF OPERATIONS |
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| Three Months Ended | Nine Months Ended | ||
| 2007 | 2006 | 2007 | 2006 |
Revenues: |
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Sale of oil and gas | $ 1,298,165 | $ 1,934,972 | $ 4,552,179 | $ 6,219,887 |
Turnkey drilling | 3,207,261 | 2,429,087 | 6,021,892 | 9,523,901 |
Supervisory fees and other | 271,813 | 266,756 | 791,225 | 878,438 |
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Total Revenues | 4,777,239 | 4,630,815 | 11,365,296 | 16,622,226 |
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Costs and Expenses: |
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General and administrative | 1,069,442 | 1,356,795 | 3,345,386 | 3,625,421 |
Turnkey drilling and development | 1,519,535 | 2,099,967 | 2,956,819 | 6,222,225 |
Lease operating | 587,772 | 634,107 | 1,970,147 | 1,796,309 |
Lease impairment | 32,930 | 13,482 | 34,894 | 123,809 |
Legal and accounting | 345,076 | 100,321 | 629,480 | 300,252 |
Marketing | 323,434 | 330,016 | 1,080,631 | 1,197,786 |
Depreciation, depletion & | 1,037,210 | 1,019,100 | 2,905,024 | 2,981,543 |
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Total Costs and Expenses | 4,915,399 | 5,553,788 | 12,922,381 | 16,247,345 |
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Loss on Sale of Assets | (0) | 0 | (44,931) | 0 |
Income (Loss) from Operations | (138,160) | (922,973) | (1,602,016) | 374,881 |
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Other Expense: |
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Interest expense | 41,729 | 144,304 | 116,435 | 395,476 |
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Income before Income Tax Expense | (179,889) | (1,067,277) | (1,718,451) | (20,595) |
Income Tax Provision (Benefit) | (58,764) | (300,140) | (579,966) | 50,498 |
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Net Income (Loss) | $ (121,125) | $ (767,137) | $(1,138,485) | $ (71,093) |
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Diluted Earnings Per Share | $ (0.02) | $ (0.10) | $ (0.14) | $ (0.01) |
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Basic Earnings Per Share | $ (0.02) | $ (0.10) | $ (0.14) | $ (0.01) |
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See notes to Financial Statements |
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ROYALE ENERGY, INC. |
STATEMENTS OF CASH FLOWS |
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| Nine Months Ended September 30, | |
| 2007 | 2006 |
| (Unaudited) | (Unaudited) |
CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income (loss) | $ (1,138,485) | $ (71,093) |
Adjustments to reconcile net income to net cash |
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provided (used) by operating activities: |
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Depreciation, depletion and amortization | 2,905,024 | 2,981,543 |
Lease impairment | 34,894 | 123,809 |
(Gain) Loss on Sale of Assets | 44,931 | 0 |
Bad Debt Expense | 0 | 208,577 |
Compensation Expense - Stock Grant | 12,752 | 26,105 |
Accounts receivable | (64,548) | 692,537 |
Prepaid expenses and other assets | 1,498,098 | 960,005 |
Increase (decrease) in: |
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Accounts payable and accrued expenses | 994,466 | (1,361,646) |
Deferred revenues - DWI | 668,029 | (759,555) |
Deferred income taxes | (651,123) | (329,096) |
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Net Cash Provided by Operating Activities | $ 4,304,038 | $ 2,471,186 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Expenditures for oil and gas properties and |
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other capital expenditures | (5,192,002) | (2,108,648) |
Proceeds from Sale of Assets | 117,870 | 0 |
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Net Cash (Used) by Investing Activities | (5,074,132) | (2,108,648) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from Long-Term Debt | 0 | 94,367 |
Payments on long-term debt | (2,318,045) | 0 |
Dividends Paid | (397,049) | 0 |
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Net Cash Used by Financing Activities | (2,715,094) | 94,367 |
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Net increase (decrease) in cash and cash equivalents | (3,485,188) | 456,905 |
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Cash at beginning of period | 7,377,604 | 4,716,772 |
Cash at end of period | $ 3,892,416 | $ 5,173,677 |
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SUPPLEMENTAL INFORMATION |
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Cash paid for interest | $ 141,564 | $ 392,349 |
Cash paid for taxes | $ 571,157 | $ 258,949 |
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See notes to financial statements |
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ROYALE ENERGY, INC. |
NOTES TO UNAUDITED FINANCIAL STATEMENTS |
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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 nine 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. |
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NOTE 2- EARNINGS PER SHARE |
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Basic and diluted earnings (loss) per share are calculated as follows: |
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| For the Nine Months ended September 30, 2007 | ||
| Income | Shares | Per-Share |
Basic Earnings Per Share: |
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Net income available to common stock | $ (1,138,485) | 7,917,543 | $ (0.14) |
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Diluted Earnings Per Share: |
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Effect of dilutive securities and stock | 0 | 0 | 0.00 |
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Net income available to common stock | $ (1,138,485) | 7,917,543 | $ (0.14) |
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| For the Nine Months ended September 30, 2006 | ||
| Income | Shares | Per-Share |
Basic Earnings Per Share: |
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Net income available to common stock | $ (71,093) | 7,932,198 | $ (0.01) |
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Diluted Earnings Per Share: |
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Effect of dilutive securities and stock | 0 | 0 | 0.00 |
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Net income available to common stock | $ (71,093) | 7,932,198 | $ (0.01) |
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ROYALE ENERGY, INC. |
NOTES TO UNAUDITED FINANCIAL STATEMENTS |
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NOTE 3 - OIL AND GAS PROPERTIES, EQUIPMENT AND FIXTURES |
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Oil and gas properties, equipment and fixtures consist of the following: |
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| September 30, 2007 | December 31, 2006 |
Oil and Gas |
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Producing properties, including drilling costs | $ 31,151,232 | $ 27,876,284 |
Undeveloped properties | 3,078,083 | 1,767,671 |
Lease and well equipment | 7,684,123 | 7,136,142 |
| 41,913,438 | 36,780,097 |
Accumulated depletion, depreciation & | (20,552,115) | (17,745,105) |
| 21,361,323 | 19,034,992 |
Commercial and Other |
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Real estate, including furniture and fixtures | $ 503,344 | $ 503,344 |
Vehicles | 313,460 | 287,155 |
Furniture and equipment | 1,517,162 | 1,702,127 |
| 2,333,966 | 2,492,626 |
Accumulated depreciation | (1,080,045) | (1,001,658) |
| 1,253,921 | 1,490,968 |
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| $ 22,615,244 | $ 20,525,960 |
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On April 4, 2005, the Financial Accounting Standards Board posted FSP FAS 19-1,Accounting for Suspended Well Costs,to be effective for reporting periods beginning after April 4, 2005. We have adopted FSP FAS 19-1 effective as of July 1, 2005. The guidance set forth in the FSP 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 performed an evaluation of our capitalized costs and determined that no previously capitalized exploratory well costs pending the determination of proved reserves were required to be expensed or reclassified during the first quarter of 2006 or 2005. We did not make any additions to capitalized exploratory well costs pending a determination of proved reserves during the first nine months of 2007 or 2006. We did not charge any previously capitalized exploratory well costs to expense upon adoption of FSP FAS 19-1. |
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ROYALE ENERGY, INC. |
NOTES TO UNAUDITED FINANCIAL STATEMENTS |
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| Nine Months ended | |
Beginning balance at January 1 | $ 0 | $ 0 |
Additions to capitalized exploratory well costs pending the |
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determination of proved reserves | 2,100,508 | 1,819,133 |
Reclassifications to wells, facilities, and equipment based on |
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the determination of proved reserves | (2,100,508) | (1,819,133) |
Ending balance at September 30 | $ 0 | $ 0 |
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Royale Energy has a stock-based employee compensation plan. Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) ("SFAS No. 123R"), Share-Based Payment, 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. SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and instead generally requires that such transactions be accounted for using a fair-value-based method. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards under SFAS No. 123R, consistent with that us ed for pro forma disclosures under SFAS No. 123, Accounting for Stock-Based Compensation. The Company has elected to use the modified prospective transition method as permitted by SFAS No. 123R and accordingly prior periods have not been restated to reflect the impact of SFAS No. 123R. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options, restricted stock, restricted stock units, and employee stock purchase plan shares that are ultimately expected to vest as the requisite service is rendered beginning on January 1, 2006. Stock-based compensation expense for awards granted prior to January 1, 2006 is based on the grant-date fair-value as determined under the pro forma provisions of SFAS No. 123. The Company recognized incremental stock-based compensation expense of $0 for the nine months ended September 30, 2007 and 2006, respectively. |
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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, 4,612 and 2,253 shares of vested restricted common stock were issued in 2005, 2006 and 2007 respectively. The Company recognized corresponding compensation expense of $34,241, $26,105, and $12,752 for 2005, 2006 and 2007, respectively. |
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NOTE 5 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
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In September 2006, the FASB issued SFAS 157 "Fair Value Measurements", which provides expanded guidance for using fair value to measure assets and liabilities. SFAS 157 establishes a hierarchy for data used to value assets and liabilities, and requires additional disclosures about the extent to which a company measures assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. Implementation of SFAS 157 is required on January 1, 2008. We are currently evaluating the impact of adopting SFAS 157 on the financial statements. |
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In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159), that provides an option to report selected financial assets and liabilities at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for the first fiscal year beginning after November 15, 2007. We are currently evaluating the impact of SFAS 159 on the Company. |
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NOTE 6 - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS |
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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. |
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Royale Energy's operations are classified into two principal industry segments. Following is a summary of segmented information for the nine months ended September 30, 2007, and 2006: |
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| Oil and Gas |
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| Producing | Turnkey |
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| Exploration | Services | Total |
Period Ended September 30, 2007 |
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Revenues from External Customers | $ 4,552,179 | $6,021,892 | $10,574,071 |
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Supervisory Fees | $ 631,909 | $ - | $ 631,909 |
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Interest Revenue | $ 159,316 | $ - | $ 159,316 |
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Interest Expense | $ 58,218 | $ 58,217 | $ 116,435 |
Expenditures for Segment Assets | $ 4,315,318 | $5,667,145 | $ 9,982,463 |
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Oil and Gas | Turnkey Drilling Services | Total | ||||
Lease Impairment | $ 17,447 | $ 17,447 | $ 34,894 | |||
Loss on Sale of Assets | $ 22,466 | $ 22,465 | $ 44,931 | |||
Income Tax (Benefit) | $ (289,983) | $ (289,983) | $ (579,966) | |||
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Total Assets | $30,885,749 | $ - | $30,885,749 | |||
Net Income (Loss) | $ (1,539,835) | $ 401,350 | $ (1,138,485) | |||
Period Ended September 30, 2006 |
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Revenues from External Customers | $ 6,219,887 | $ 9,523,901 | $15,743,788 |
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Supervisory Fees | $ 761,265 | $ - | $ 761,265 |
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Interest Revenue | $ 117,173 | $ - | $ 117,173 |
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Interest Expense | $ 197,738 | $ 197,738 | $ 395,476 |
Expenditures for Segment Assets | $ 4,112,456 | $ 9,029,537 | $13,141,993 |
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Depreciation, Depletion, and Amortization | $ 2,832,466 | $ 149,077 | $ 2,981,543 |
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Lease Impairment | $ 61,905 | $ 61,904 | $ 123,809 |
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Income Tax | $ 25,249 | $ 25,249 | $ 50,498 |
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Total Assets | $ 40,495,283 | $ - | $40,495,283 |
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Net Income (Loss) | $ (131,489) | $ 60,396 | $ (71,093) |
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Item 2. Management's Discussion And Analysis Of Financial |
Forward Looking Statements |
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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. |
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Results of Operations |
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For the first nine months of 2007, we had a net loss of $1,138,485, a $1,067,392 increase from the net loss of $71,093 we had during the first nine months of 2006. The loss resulted from decreases in revenues from both the turnkey drilling and the oil and natural gas production segments of our business. We had a net loss of $121,125 for the third quarter of 2007, a $646,012 improvement from the net loss of $767,137 achieved during the third quarter of 2006. Total revenues for the first nine months in 2007 declined by $5,256,930 (31.6%) to $11,365,296 from the total revenues of $16,622,226 received during the period in 2006. Lower turnkey drilling revenues accounted for 67% of the decrease, and lower oil and natural gas production accounted for 32% of the decrease. Total revenues for the third quarter of 2007 were $4,777,239, a $146,424 or 3.2% increase from the third quarter 2006 revenues of $4,630,815. |
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In the first nine months of 2007, revenues from oil and gas production decreased by $1,667,708 or 26.8% to $4,552,179 from the 2006 nine months revenues of $6,219,887 mainly due to a decreases in natural gas and oil production. In the third quarter 2007, oil and gas revenue decreased $636,807 or 32.9% from the third quarter 2006 revenues of $1,934,972. The net sales volume of natural gas for the nine months ended September 30, 2007, was approximately 600,579 Mcf with an average price of $6.51 per Mcf, versus 838,475 Mcf with an average price of $6.22 per Mcf for the first nine months of 2006. This represents a decrease in net sales volume of 237,896 Mcf or 28.4%. For the third quarter of 2007, the net sales volume of natural gas decreased 78,856 Mcf, from 269,818 Mcf in the period in 2006 to 190,962 Mcf in 2007 and the average price decreased $0.13 per Mcf. This decrease was partially due to natural declines in production from existing wells and to the sale of a number of underperforming properties at the end of 2006. |
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The net sales volume for oil and condensate (natural gas liquids) was 10,872 barrels with an average price of $58.87 per barrel for the first nine months of 2007, compared to 16,153 barrels at an average price of $62.20 per barrel for the nine months in 2006. This represents a decrease in net sales volume of 5,281 barrels, or 32.7%. For the third quarter of 2007, production decreased 2,268 barrels, or 42.3% from the same quarter in 2006 and the average price for oil |
and condensate increased $3.30 per barrel, from $63.73 in 2006 to $67.03 in 2007. These |
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production decreases are mainly due to the natural production declines of existing wells. |
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Oil and natural gas lease operating expenses increased by $173,838 or 9.7%, to $1,970,147 for the nine months ended September 30, 2007, from $1,796,309 for the nine months in 2006. This increase was mainly due to higher workover costs during the period in 2007 when compared to 2006, as we attempted to increase production on some of our existing wells. For the third quarter 2007, lease operating expenses decreased $46,335 or 7.3% over the same period in 2006. |
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For the nine months ended September 30, 2007, turnkey drilling revenues decreased $3,502,009 or 36.8% to $6,021,892 from $9,523,901 in the same nine months in 2006. We also had a $3,265,406 or 52.5% decrease in turnkey drilling and development costs to $2,956,819 in 2007 from $6,222,225 in 2006. These decreases were due to fewer wells drilled, five during the period in 2007 while nine wells were drilled during the period in 2006. In the third quarter of 2007, turnkey drilling revenues increased $778,174 or 32%, but the related costs decreased, $580,432, or 27.6% over the same quarter in 2006. Turnkey drilling revenues were higher due to increased direct working interest sales and costs were lower due to decreased drilling during the period in 2007. During the first six months 2007, we processed the permits on several wells in Utah. In the third quarter 2007, we completed and began testing one of these wells and began drilling a second well which should be completed during the fourth quarter 2007. A third Utah well should also be drilled and completed during the fourth quarter 2007. |
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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 $34,894 and $123,809 were recorded in the first nine months of 2007 and 2006, respectively. These impairments were mainly due to various lease and land costs that were determined to be associated with prospects that are no longer viable. During the period in 2007 we also recorded a loss of $44,931 on the sale of a non-oil and gas asset. |
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The aggregate of supervisory fees and other income was $791,225 for nine months ended September 30, 2007, a decrease of $87,213 (9.9%) from $878,438 during the period in 2006. This was mainly due to lower supervisory fees during the period in 2007 due to the decrease in drilling. Third quarter supervisory fees and other income increased $5,057 or 1.9% to $271,813 from $266,756 in 2006. |
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Depreciation, depletion and amortization expense decreased to $2,905,024 from $2,981,543, a decrease of $76,519 (2.6%) for the nine months ended September 30, 2007, as compared to the same period in 2006. This decrease in depletion expense was mainly due to the decrease in our oil and gas assets from our 2006 asset sale and impairments. |
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General and administrative expenses decreased by $280,035 or 7.7%, from $3,625,421 for the nine months ended September 30, 2006, to $3,345,386 for the period in 2007. Third quarter 2007 general and administrative expenses decreased $287,353 or 21.2% from $1,356,795 in 2006 compared to $1,069,442 in 2007. These decreases were primarily due to a bad debts write-off during the period in 2006 of approximately $208,577 for receivables from direct working interest investors whose expenses on non-producing wells are contractually not collectable. Legal and accounting expense increased to $629,480 for the period, compared to $300,252 for |
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period in 2006, a $329,228 or 110% increase. For the quarter, legal and accounting expenses increased $244,755 or 244% from the previous year. The increase in legal and accounting expense was a result of higher legal fees due to litigation defending property rights during the period. Marketing expense for the nine months ended September 30, 2007, decreased $117,155, or 9.8 %, to $1,080,631, compared to $1,197,786 for the period in 2006. For the third quarter, marketing expenses decreased $6,582, or 2%, to $323,434, compared to $330,016 for the same period in 2006. 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 decreased to $116,435 for the nine months ended September 30, 2007, from $395,476 for the same period in 2006, a $279,041, or 70.6% decrease. This decrease was due to principal balance reduction on our line of credit. |
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For the first nine months in 2007 we had an income tax benefit of $579,966 due to our net operating loss. For the same period in 2006 our income tax expense was $50,498 due to our net operating income for the period. |
Capital Resources and Liquidity |
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At September 30, 2007, Royale Energy had current assets totaling $8,263,559 and current liabilities totaling $13,829,151, a $5,565,592 working capital deficit. We had cash and cash equivalents at September 30, 2007, of $3,892,416 compared to $7,377,604 at December 31, 2006. During the nine months ended September 30, 2007, we repaid approximately $2,318,045 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 September 30, 2007, we had outstanding indebtedness of $1,725,000, compared to $3,810,000 at December 31, 2006. |
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Our loan from Guaranty Bank, FSB, secured by our non-oil and gas real estate assets was repaid on March 19, 2007 in the amount of $217,774, compared to outstanding indebtedness of $233,045 at December 31, 2006. |
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At September 30, 2007, our accounts receivable totaled $2,970,838, compared to $2,906,290 at December 31, 2006, a $64,548 (2.2%) increase, primarily due to receivables from industry members participating in wells we are scheduled to drill. At September 30, 2007, our accounts payable and accrued expenses totaled $8,142,861, an increase of $984,249 or 13.7% from the accounts payable at December 31, 2006, of $7,158,612, mainly due to an increase in our trade accounts payable related to drilling activities at the end of the period in 2007. |
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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 2007 and do not foresee any liquidity demands that cannot be met from cash flow or financing activities. |
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Operating Activities.For the nine months ended September 30, 2007, cash provided by operating activities totaled $4,304,038 compared to $2,471,186 for the same period in 2006, a |
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$1,832,852 or 74.2% increase. This increase in cash provided was due to a decrease in accounts receivables and an increase in direct working interest sales during the period in 2007. |
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Investing Activities.Net cash used by investing activities, primarily in capital acquisitions of oil |
and gas properties, amounted to $5,074,132 for the period in 2007, compared to $2,108,648 used by investing activities for the same period in 2006, a $2,965,484 or 141% increase in cash used. This was mainly due to lower expenditures for undeveloped properties during the period in 2006 due to the allocation of previously capitalized lease and land costs to various wells to be drilled. |
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Financing Activities. For the nine months ended September 30, 2007, cash used by financing activities was $2,715,094 compared to $94,367 provided by financing activities for the same period in 2006. This difference was primarily due to principal payments on our commercial bank line of credit and loan during the period in 2007 when compared to 2006. Also, on January 18, 2007, the Board of Directors declared a cash dividend of $0.05 per share for shareholders of record on February 19, 2007. This dividend was paid March 5, 2007, in the amount of $397,049.05. |
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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 |
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Item 4. Controls and Procedures |
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As of September 30, 2007, 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 September 30, 2007. |
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No changes occurred in our internal control over financial reporting during the nine months ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
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PART II OTHER INFORMATION |
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Item 1 Legal Proceedings |
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There were no material developments during the third quarter of 2007 in any material legal proceedings in which we are involved. See our Form 10-Q for the period ended June 30, 2007. |
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Item 1A Risk Factors |
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There were no changes in the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2006, during the first nine months of 2007. |
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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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| ROYALE ENERGY, INC. |
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Date: November 14, 2007 | /s/ Donald H. Hosmer |
| Donald H. Hosmer, President and Chief Executive Officer |
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Date: November 14, 2007 | /s/ Stephen M. Hosmer |
| Stephen M. Hosmer, Executive Vice President and Chief Financial Officer |
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