Royale Energy Funds 10-Q 2010 Q2 Quarterly report

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 June 30, 2010 Commission File No. 000-22750

ROYALE ENERGY, INC.

(Exact name of registrant as specified in its charter)

California	33-0224120
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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:

Large accelerated filer  __	Accelerated filer  __
Non-accelerated filer  __	Smaller reporting company  X

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 June 30, 2010, a total of 10,243,066 shares of registrant’s common stock were outstanding.

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4	Controls and Procedures	15
PART II	OTHER INFORMATION	15
Item 1	Legal Proceedings	15
Item 1A	Risk Factors	15
Item 6.	Exhibits	15
	Signatures	16

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PART I.                      FINANCIAL INFORMATION

Item 1.  Financial Statements

ROYALE ENERGY, INC.
BALANCE SHEETS
	June 30, 2010		December 31, 2009
	(Unaudited)		(Audited)
ASSETS
Current Assets
Cash and Cash Equivalents	$	3,209,789	$	3,835,282
Accounts Receivable		2,086,360		2,493,108
Prepaid Expenses		838,293		842,226
Available for Sale Securities		713,830		1,000,320
Inventory		839,374		845,874
Total Current Assets		7,687,646		9,016,810
Other Assets		6,946		6,946
Deferred Tax Asset-Noncurrent		5,324,340		5,740,414
Oil and Gas Properties, at cost, (successful efforts basis),
Equipment and Fixtures		8,721,276		8,800,293
Total Assets	$	21,740,208	$	23,564,463

See notes to unaudited financial statements

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ROYALE ENERGY, INC.
BALANCE SHEETS
	June 30, 2010		December 31, 2009
	(Unaudited)		(Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses	$	4,822,904	$	5,128,987
Current Portion of Long-Term Debt		22,917		50,417
Current Portion of Deferred Tax Liability		263,998		323,757
Deferred Revenue from Turnkey Drilling		3,353,678		4,979,605
Total Current Liabilities		8,463,497		10,482,766
Noncurrent Liabilities:
Asset Retirement Obligation		547,605		514,361
Long-Term Debt, Net of Current Portion		2,040,000		2,440,000
Total Noncurrent Liabilities		2,587,605		2,954,361
Total Liabilities		11,051,102		13,437,127
Stockholders' Equity:
Common Stock, no par value, authorized 20,000,000 shares,
10,275,685 and 10,257,827 shares issued; 10,243,066 and
10,225,208 shares outstanding, respectively		27,246,740		27,246,740
Convertible preferred stock, Series AA, no par value,
147,500 shares authorized; 52,784 and 52,784 shares
issued and outstanding, respectively		154,014		154,014
Accumulated Deficit		(17,412,573)		(18,115,452)
Accumulated Other Comprehensive Income		445,674		676,563
Total Paid in Capital and Accumulated Deficit		10,443,855		9,961,865
Less Cost of Treasury Stock 32,619 and 32,619 shares		(179,376)		(179,376)
Additional Paid in Capital		434,627		344,847
Total Stockholders' Equity		10,689,106		10,127,336
Total Liabilities and Stockholders' Equity	$	21,740,208	$	23,564,463

See notes to unaudited financial statements

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ROYALE ENERGY, INC.
STATEMENTS OF OPERATIONS
	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Revenues:
Sale of Oil and Gas	$	634,630	$	622,928	$	1,425,411	$	1,461,505
Turnkey drilling		3,253,736		518,907		3,978,564		1,809,374
Supervisory Fees and Other		226,821		158,560		360,191		297,686
Total Revenues		4,115,187		1,300,395		5,764,166		3,568,565
Costs and Expenses:
General and Administrative		1,008,763		854,201		1,949,808		1,757,983
Turnkey Drilling and Development		649,518		(334,150)		1,103,604		886,544
Lease Operating		336,600		332,934		595,009		779,872
Lease Impairment		114,048		15,359		114,048		15,359
Bad Debt Expense		0		13,700		0		29,565
Legal and Accounting		62,563		161,908		254,560		528,419
Marketing		152,649		168,313		303,401		381,020
Depreciation, Depletion and Amortization		238,937		515,349		478,622		1,058,124
Total Costs and Expenses		2,563,078		1,727,614		4,799,052		5,436,886
Loss on Sale of assets		0		(33,482)		0		(33,482)
Income (Loss) From Operations		1,552,109		(460,701)		965,114		(1,901,803)
Other Income (Expense):
Interest Expense		(5,035)		(22,135)		(10,544)		(41,096)
Gain on Sale of Marketable Securities		164,383		0		164,383		0
Income Before Income Tax Expense		1,711,457		(482,836)		1,118,953		(1,942,899)
Income tax provision		636,063		(188,105)		416,074		(757,112)
Net Income (Loss)	$	1,075,394	$	(294,731)	$	702,879	$	(1,185,787)
Diluted Earnings (Loss) Per Share	$	0.10	$	(0.03)	$	0.06	$	(0.14)
Basic Earnings (Loss) Per Share	$	0.11	$	(0.03)	$	0.07	$	(0.14)
Other Comprehensive Income
Unrealized Gain (Loss) on Equity Securities	$	(611,512)	$	110,855	$	(455,032)	$	141,869
Less: Reclassification Adjustment for Losses
(Gains) Included in Net Income		(164,383)		28,648		(164,383)		28,648
Other Comprehensive Income (Loss), before tax		(447,129)		82,207		(290,649)		113,221
Income Tax Expense (Benefit) Related to Items of
Other Comprehensive Income (Loss)		(165,175)		31,978		(59,759)		45,666
Other Comprehensive Income (Loss), net of tax		(281,954)		50,229		(230,890)		67,555
Comprehensive Income (Loss)	$	793,740	$	(244,502)	$	471,989	$	(1,118,232)

See notes to unaudited financial statements

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ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
	2010		2009
	(Unaudited)		(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)	$	702,879	$	(1,185,787)
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided (Used) by Operating Activities:
Depreciation, Depletion and Amortization		478,622		1,058,124
Lease Impairment		114,048		15,359
Loss on Sale of Assets		0		33,482
Realized (Gain)/Loss on Equity Securities		(164,383)		28,648
Bad Debt Expense		0		29,565
Stock-Based Compensation, net of adjustments		89,780		89,783
(Increase) Decrease in:
Accounts Receivable		406,748		1,741,904
Prepaid Expenses and Other Assets		10,433		1,811,300
Increase (Decrease) in:
Accounts Payable and Accrued expenses		(272,839)		(4,426,772)
Deferred Revenues - DWI		(1,625,927)		699,490
Deferred Income Tax expense (benefit)		416,074		(800,017)
Net Cash Provided (Used) by Operating Activities		155,435		(904,921)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for Oil and Gas Properties
and Other Capital Expenditures		(513,653)		(218,517)
Proceeds from Sale of Assets		0		1,500
Purchase of Equity Securities		(4,159)		(8,399)
Sale of Equity Securities		164,384		20,026
Net Cash Used by Investing Activities		(353,428)		(205,390)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Long-Term Debt		4,320,000		4,654,181
Principal Payments on Long-Term Debt		(4,747,500)		(3,975,974)
Net Cash Provided (Used) by Financing Activities		(427,500)		678,207
Net Decrease in Cash and Cash Equivalents		(625,493)		(432,104)
Cash at Beginning of Year		3,835,282		1,330,739
Cash at End of Period	$	3,209,789	$	898,635
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash Paid for Interest	$	4,258	$	41,096
Cash Paid for Taxes	$	4,168	$	42,905
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING & FINANCING ACTIVITIES:
Other Comprehensive Income Items
Unrealized Gain (Loss) on Equity Securities		(290,649)	$	113,221
Income Tax Expense (Benefit) Relating to Items of
Other Comprehensive Income (Loss)		(59,759)		45,666
Other Comprehensive Income (Loss), net of tax		(230,890)	$	67,555

See notes to unaudited financial statements

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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 six 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 Six Months ended June 30, 2010
	Income (Numerator)		Shares (Denominator)		Per-Share Amount
Basic Earnings (Loss) Per Share:
Net income available to common stock	$	702,879		10,241,783	$	0.07
Diluted Earnings (Loss) Per Share:
Effect of dilutive securities and stock      options		-		954,159		(0.01)
Net income available to common stock	$	702,879		11,195,942	$	0.06
	For the Six Months ended June 30, 2009
	Income (Numerator)		Shares (Denominator)		Per-Share Amount
Basic Earnings (Loss) Per Share:
Net income available to common stock	$	(1,185,787)		8,506,098	$	(0.14)
Diluted Earnings (Loss) Per Share:
Effect of dilutive securities and stock      options		0		0		0.00
Net income available to common stock	$	(1,185,787)		8,506,098	$	(0.14)

For the six months ended June 30, 2009, Royale Energy had dilutive securities of 26,392.  These securities were not included in the dilutive loss per share due to their anti-dilutive nature.

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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:

	June 30, 2010		December 31, 2009
Oil and Gas
Producing properties, including drilling costs	$	24,065,861	$	23,746,696
Undeveloped properties		532,815		570,831
Lease and well equipment		9,339,271		9,251,307
		33,937,947		33,568,834
Accumulated depletion, depreciation & amortization		(25,933,229)		(25,512,869)
		8,004,718		8,055,965
Commercial and Other
Real estate, including furniture and fixtures	$	502,344	$	502,344
Vehicles		255,496		255,496
Furniture and equipment		1,264,098		1,258,439
		2,021,938		2,016,279
Accumulated depreciation		(1,305,380)		(1,271,951)
		716,558		744,328
	$	8,721,276	$	8,800,293

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 2010 or 2009.

	Six Months ended June 30,
	2010		2009
Beginning balance at January 1	$	0	$	0
Additions to capitalized exploratory well costs pending the      determination of proved reserves		433,220		0
Reclassifications to wells, facilities, and equipment based on      the determination of proved reserves		(433,220)		(0)
Ending balance at June 30	$	0	$	0

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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 $37,374 in the first six months of 2010 and 2009 relating to these options. The total income tax benefits recognized in the income statement for these option arrangements were $13,903 in 2010 and $14,538 in 2009.

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.  The grant is to be vested in three parts; 31,667 or 63,334 shares, depending on Royale’s stock price, will vest on November 30, 2010 and 2011.  The first 31,665 shares vested on November 30, 2009.  Royale has recognized share-based compensation expense of $52,406 and $19,495 as a tax benefit in the first two quarters of 2010 relating to this grant.  During the same time period in 2009, Royale recognized $52,409 in compensation expense resulting in a $20,387 tax benefit relating to this stock grant.

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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 1 5, 2009. The adoption of this standard did not have a significant impact on the Company’s interim financial information.

In June 2009, the Financial Accounting Standards Board issued Generally Accepted Accounting Principles Topic of the FASB Accounting Standards Codification. The Topic sets forth that the Financial Accounting Standards Board Accounting Standards Codification is the exclusive authoritative reference for nongovernmental U.S. GAAP for use in financial statements issued for interim and annual periods ending after September 15, 2009, except for SEC rules and interpretive releases, which also are authoritative GAAP for SEC registrants. The change was established by FASB Statement of Financial Accounting Standards No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (FAS 168), which divides nongovernmental U.S. GAAP into the authoritative Codification and guidance that is nonauthoritative, doing away with the previous four-level hierarchy. The Topic is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The Topic was not intended to change or alter existing GAAP, and the Company’s adoption did not have any impact on its consolidated financial statements other than to modify certain existing disclosures. Upon adoption, the Company began to use the new guidelines and numbering system prescribed by the Topic when referring to GAAP in the third quarter of fiscal year 2009.

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.

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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 six months ended June 30, 2010, and 2009:

	Oil and Gas
	Producing			Turnkey
	and			Drilling
	Exploration			Services		Total
Six Months Ended June 30, 2010:
Revenues from External Customers	$	1,425,411		$	3,978,564	$	5,403,975
Supervisory Fees		353,284			0		353,284
Interest Revenue		0			6,907		6,907
Interest Expense		5,272			5,272		10,544
Expenditures for Segment Assets		1,895,586			2,310,796		4,206,382
DD&A		454,691			23,931		478,622
Lease Impairment		57,024			57,024		114,048
Gain on Sale of Marketable Securities		0			164,383		164,383
Income Tax Expense		(235,703)			651,777		416,074
Total Assets	$	20,653,198		$	1,087,010	$	21,740,208
Net Income (Loss)	$	(398,175	)	$	1,101,054	$	702,879

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	Oil and Gas
	Producing		Turnkey
	and		Drilling
	Exploration		Services		Total
Six Months Ended June 30, 2009:
Revenues from External Customers	$	1,461,505	$	1,809,374	$	3,270,879
Supervisory Fees		295,792		0		295,792
Interest Revenue		0		1,894		1,894
Interest Expense		20,548		20,548		41,096
Expenditures for Segment Assets		2,146,292		2,217,111		4,363,403
DD&A		1,005,218		52,906		1,058,124
Lease Impairment		7,680		7,679		15,359
Loss on Sale of Assets		(33,482)		0		(33,482)
Income Tax (Benefit)		(567,346)		(189,766)		(757,112)
Total Assets	$	19,107,418	$	1,005,654	$	20,113,072
Net Loss	$	(888,577)	$	(297,210)	$	(1,185,787)

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 June 30, 2010 the fair value of the remaining portion of the Settlement Stock was $710,830, and the shares were classified as available for sale securities.

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At June 30, 2010 and 2009, Royale Energy reported the fair value of $713,830 and $291,884 in available for sale securities, respectively.  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 those securities on that day.   For the purposes of identifying related costs to its available for sale securities, the Company uses a specific identification method. On June 30, 2009, the total cost for those securities amounted to $410,539. For the six months ended June 30, 2010, an unrealized holding loss of $230,890 was recorded in the other comprehensive income (loss) section of the Statement of Operations.  The unrealized holding loss included an income tax benefit of $59,759.  Royale also recognized a realized gai n of $164,383 and a related income tax expense of $61,150 from the partial liquidation of the Settlement Stock for the period ending June 30, 2010.  For the six months ended June 30, 2009, an unrealized holding gain of $67,555 was recorded in the other comprehensive income (loss) section of the Statement of Operations. The unrealized holding gain included the income tax effect of $45,666.

  The table below summarizes Royale’s fair value measurements and the level within the fair value hierarchy in which the fair value measurements fall:

Description	June 30, 2010		Level 1		December 31, 2009		Level 1
Available for Sale Securities	$	713,830	$	713,830	$	1,000,320	$	1,000,320

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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 six months ended June 30, 2010, we had net income of $702,879, a $1,888,666improvement when compared to the net loss of $1,185,787 during the first six months of 2009.  Total revenues for the first six months of 2010 were $5,764,166, an increase of $2,195,601 or 61.5% from the total revenues of $3,568,565 during the period in 2009.  This increase in revenues was mainly the result of higher turnkey drilling revenues due to an increase in the number of wells drilled during the period.  For the quarter ended June 30, 2010, our net income was $1,075,394, a $1,370,125 improvement compared to a net loss of $294,731, also the result of higher turnkey drilling revenues.

In the first six months of 2010, revenues from oil and gas production decreased $36,094 or 2.5% to $1,425,411 from 2009 first half revenues of $1,461,505, due to lower production volume which was offset by higher commodity prices.  The net sales volume of natural gas for the six months ended June 30, 2010, was approximately 249,152 Mcf with an average price of $4.75 per Mcf, versus 322,789 Mcf with an average price of $3.97 per Mcf for the first six months of 2009.  This represents a decrease in net sales volume of 73,637 Mcf or 22.8%, mainly due to the natural declines in production from existing wells.  For the quarter ended June 30, 2010, revenues from oil and gas increased to $634,630 from $622,928 received during the same period in 2009.  During the second quarter in 2010, we produced 123,326 M cf with an average price of $4.22 per Mcf versus 145,861 Mcf produced during the same quarter in 2009 with an average price of $3.45 per Mcf, which represents a 22,535 Mcf or 15.5% decrease in net sales volume.  The net sales volume for oil and condensate (natural gas liquids) was 3,419 barrels with an average price of $70.85 per barrel for the first six months of 2010, compared to 4,358 barrels at an average price of $41.30 per barrel for the first six months in 2009.  This represents a decrease in net sales volume of 939 barrels, or 21.5%.  For the second quarter of 2010, oil and condensate production decreased 775 barrels, or 32.9%, from 2,356 barrels produced in 2009 to 1,581 barrels produced in the same period in 2010.  This decrease was mainly due to the natural declines in production from existing wells.

Oil and natural gas lease operating expenses decreased by $184,863 or 23.7%, to $595,009 for the six months ended June 30, 2010, from $779,872 for the same period in 2009.   This decrease was mainly due to lower workover costs, lower production, and other reduced lease operating costs during the period in 2010.  For the second quarter of 2010, lease operating expenses increased $3,666 or 1.1% over the same period in 2009.

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For the six months ended June 30, 2010, turnkey drilling revenues increased $2,169,190 or 119.9% to $3,978,564 from $1,809,374 during the same period in 2009.  We also had a $217,060 or 24.5% increase in turnkey drilling and development costs to $1,103,604 in 2010 from $886,544 in 2009. In the second quarter of 2010, turnkey drilling revenues increased $2,734,829 or 527% from $518,907 during the period in 2009 to $3,253,736 in 2010.  Also, during the second quarter in 2010, our turnkey drilling costs increased by $983,668 to $649,518 in 2010 from a negative balance during the period in 2009 of $334,150 stemming from adjustments on previously drilled wells with lower than anticipated drilling costs.  Turnkey drilling revenues increased due to a greater number of wells drilled in the first six months of 2010 th an in 2009.  For the first half of 2010, we reached total depth on five wells, while during the same period in 2009 we reached total depth on two wells.  Turnkey drilling costs rose due to an increase in drilling activity during 2010, and the absence of drilling adjustments recognized in 2009.  We anticipate drilling activity to continue in the next quarter as we have processed permits for several new wells, and expect to drill three California wells during the third quarter of 2010.  To date, we have successfully drilled one of these California wells.

We periodically review our proved properties for impairment on a field-by-field basis and charge impairments of value to the expense.  Impairment losses of $114,048 and $15,359 were recorded in the first six months of 2010 and 2009, respectively.  These impairments were mainly due to various lease and land costs that were no longer viable.  Also during the period in 2009, we recorded losses of $33,482 on the sales of non-oil and gas assets.

The aggregate of supervisory fees and other income was $360,191 for the six months ended June 30, 2010, an increase of $62,505 (21%) from $297,686 during the same period in 2009.  Second quarter 2010 supervisory fees and other income increased $68,261, or 43.1%, to $226,821 from $158,560 in 2009.    These increases were due to licensing fees received for certain portions of our seismic data offset by lower cost recovery fees on facilities due to lower natural gas production.

Depreciation, depletion and amortization expense decreased to $478,622 from $1,058,124, a decrease of $579,502 (54.8%) for the six months ended June 30, 2010, as compared to the same period in 2009. This decrease in depletion expense was mainly due to the decrease in our oil and gas assets from our 2009 and 2008 impairments.

General and administrative expenses increased by $191,825, or 10.9%, from $1,757,983 for the six months ended June 30, 2009, to $1,949,808 for the period in 2010.  Second quarter 2010 general and administrative expense increased $154,562, or 18.1% from $854,201 in 2009 compared to $1,008,763 in 2010.   These increases were primarily due to increased employee related costs.

Marketing expense for the six months ended June 30, 2010, decreased $77,619, or 20.4%, to $303,401 compared to $381,020 for the same period in 2009.  For the second quarter, marketing expenses decreased $15,664, or 9.3%, to $152,649 from $168,313 for the same period in 2009.   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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Legal and accounting expense decreased to $254,560 for the first six months of 2010, compared to $528,419 for same period in 2009, a $273,859 or 51.8% decrease.  For the second quarter 2010, legal and accounting expenses decreased by $99,345, or 61.4% from the same period last year.  The decrease in legal and accounting expense was a result of higher legal fees in 2009 primarily related to the Pioneer litigation and the establishing of Royale’s new credit facility with Texas Capital Bank.

Interest expense decreased to $10,544 for the two quarters ended June 30, 2010, from $41,096 for the same period in 2009, a $30,552, or 74.3% decrease. This was due to a decrease in the usage of our bank line of credit.  For the six months ended June 30, 2010, we had income tax expense of $416,074 due to a net operating profit.  However, for the same period in 2009, we had an income tax benefit of $757,112 due to a net operating loss.

During the second quarter of 2010, we received title to  securities stemming from a litigation settlement received approximately 10 years ago, the securities at that time had an undeterminable value.  In June 2010, Royale began to liquidate its position and, as of the date of this filing, has fully liquidated its position.  For the first six months of 2010, the Company has recognized a net unrealized holding loss of $230,890 in the other comprehensive income section of the Statement of Operations, and a realized gain of $164,383 from the partial liquidation of these securities in the other income section of the Statement of Operations.

Capital Resources and Liquidity

At June 30, 2010, Royale Energy had current assets totaling $7,687,646 and current liabilities totaling $8,463,497, a $775,851 working capital deficit.  We had cash and cash equivalents at June 30, 2010, of $3,209,789 compared to $3,835,282 at December 31, 2009.

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 Energy may borrow, repay, and reborrow funds as necessary.  At June 30, 2010, we had a current borrowing base of $2,750,000 and outstanding indebtedness on this loan of $2,040,000.  Unused available credit from this revolving line of credit totaled $710,000 at June 30, 2010.

At June 30, 2010, 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 June 30, 2010, our accounts receivable totaled $2,086,360, compared to $2,493,108 at December 31, 2009, a $406,748 (16.3%) decrease, primarily due to lower receivables of oil and natural gas revenues.  At June 30, 2010, our accounts payable and accrued expenses totaled $4,822,904, a decrease of $306,083 or 6% from the accounts payable at December 31, 2009, of $5,128,987, mainly due to paying down our accounts payable.

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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 2010 and do not foresee any liquidity demands that cannot be met from cash flow or financing activities.

Operating Activities.  For the six months ended June 30, 2010, cash provided by operating activities totaled $155,435 compared to cash used by operating activities of $904,921 for the same period in 2009, a $1,060,356 difference.   This difference was mainly due to the reduction in decreases in Accounts Payable and Accrued Expenses.  At the end of 2008, we had drilled or begun to drill several expensive wells.  These new wells caused our December 31, 2008 Accounts Payable and Accrued Expense balances to increase significantly.  Then during the first half of 2009, we had paid down approximately $4 million in related payables and accrued expense.  However, for the same time period during late 2009, the wells we drilled w ere not as expensive, which resulted in fewer payable and accrued expenses to pay down during the first half of 2010.

Investing Activities.Net cash used by investing activities, primarily in capital acquisitions of oil and gas properties, amounted to $353,428 for the six month period ended June 30, 2010, compared to $205,390 used by investing activities for the same period in 2009, a $148,038 or 72.1% increase in cash used.  This rise in capital acquisition costs was also the result of our increased drilling activity in 2010, as three more wells were drilled during the first six months of 2010 than 2009.

Financing Activities.  For the six months ended June 30, 2010, cash used by financing activities amount to $427,500 compared to cash provided by financing activity of $678,207 for the same period in 2009.  This difference was primarily due to entering into the new credit agreement with Texas Capital Bank, and drawing down less on our new credit line to fund continued drilling and corporate operations.

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 $4.10 per Mcf to a high of $5.79 per Mcf for the first six months of 2010.  We have not entered 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 June 30, 2010, 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 June 30, 2010.

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No changes occurred in our internal control over financial reporting during the six months ended June 30, 2010, 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 actions taken were Depositions Duces Tecum taken of Company personnel by the counsel for National Fuel Corporation.  The Company is preparing to depose NFC personnel on August 4-5, 2010.  The case remains active and the Company intends to defend itself vigorously.

Item 1A Risk Factors

Please review the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

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

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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.

	ROYALE ENERGY, INC.
Date:    August 4, 2010	/s/ Donald H. Hosmer
	Donald H. Hosmer, Co-President and Co-Chief Executive Officer
Date:    August 4, 2010	/s/ Stephen M. Hosmer
	Stephen M. Hosmer, Co-President, Co-Chief Executive Officer, and Chief Financial Officer

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