FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, certain information
contained in this Quarterly Report on Form 10-Q, as well as other written and
oral statements made or incorporated by reference from time to time by the
Company and its representatives in other reports, filings with the SEC, press
releases, conferences or otherwise, may be deemed to be "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). This information includes, without
limitation, statements concerning the Company's future financial position and
results of operations, planned capital expenditures, business strategy and other
plans for future operations, the future mix of revenues and business, customer
retention, project reversals, commitments and contingent liabilities, future
demand and industry conditions. While we believe our forward-looking statements
are based upon reasonable assumptions, we can give no assurance that such
expectations will prove to have been correct. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. Generally, the words "anticipate,"
"believe," "estimate," "expect," "may" and similar expressions, identify
forward-looking statements, which generally are not historical in nature. Actual
results could differ materially from the results described in the
forward-looking statements due to the risks and uncertainties set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," elsewhere in this Quarterly Report on Form 10-Q, in the Company's
Annual Report on Form 10-K for the year ended December 31, 2021, and those
described from time to time in our future reports filed with the SEC.
The following discussion is qualified in its entirety by, and should be read in
conjunction with, the Company's financial statements, including the notes
thereto, included in this Quarterly Report on Form 10-Q and the Company's Annual
Report on Form 10-K for the year ended December 31, 2021.
OVERVIEW
Royale is an independent oil and natural gas producer. Royale's principal lines
of business are the production and sale of oil and natural gas, acquisition of
oil and gas lease interests and proved reserves, drilling of both exploratory
and development wells, and sales of fractional working interests in wells to be
drilled by Royale. Since 1993, Royale has primarily acquired and developed
producing and non-producing natural gas properties in California. In December
2018, Royale became the operator of a newly acquired field in Texas. The most
significant factors affecting the results of operations are (i) changes in oil
and natural gas prices, production levels and reserves, (ii) turnkey drilling
activities, and (iii) the increase in future cost associated with abandonment of
wells.
RESULTS OF OPERATIONS
For the nine months ended September 30, 2022 and 2021, we had net losses of
$739,184 and $2,577,999, respectively. The difference was primarily due to the
completion of one oil well in Texas and participating in the drilling and
completion of two oil wells in southern California where we recognized a gain on
turnkey drilling of $627,136 and to a gain on settlement of accounts payable
during the period in 2022 of approximately $422,614. During the three months
ended September 30, 2022 and 2021, we had net losses of $426,331 and $982,328,
respectively. The difference was due to higher oil and gas sales during the
third quarter in 2022 and to a $254,295 loss on sale of assets during the third
quarter in 2021.
During the first nine months of 2022, revenues from oil and gas production
increased $526,783 or 43.8%, to $1,729,129 from revenues of $1,202,346 during
the first nine months of 2021. This increase was mainly due to higher oil and
natural gas commodity prices. The net sales volume of oil and condensate for the
nine months ended September 30, 2022, was approximately 11,330 barrels with an
average price of $98.69 per barrel, versus 14,734 barrels with an average price
of $62.02 per barrel for the nine months of 2021. This represents a decrease in
net sales volume of 3,404 barrels or 23.1%, which was due to lower production
volumes due to natural declines in our wells and to the sale of certain
non-operated wells during the period in 2021. The net sales volume of natural
gas for the nine months ended September 30, 2022, was approximately 99,830 Mcf
with an average price of $6.04 per Mcf, versus 88,287 Mcf with an average price
of $3.26 per Mcf for the same period in 2021. This represents an increase in net
sales volume of 11,543 Mcf or 13.1%. The increase in natural gas production
volume was due to certain non-operated wells that had previously been offline
were brought back online at the end of 2021. For the quarter ended September 30,
2022, revenues from oil and gas production increased $117,040 or 27.5% to
$542,510 from the 2021 third quarter revenues of $425,470. This increase was
also due to higher oil and natural gas commodity prices. The net sales volume of
oil and condensate for the quarter ended September 30, 2022, was approximately
3,143 barrels with an average price of $96.37 per barrel, versus 4,564 barrels
with an average price of $68.05 per barrel for the third quarter of 2021. This
represents a decrease in net sales volume of 1,421 barrels or 31.1% for the
third quarter in 2022. The net sales volume of natural gas for the quarter ended
September 30, 2022, was approximately 34,522 Mcf with an average price of $6.86
per Mcf, versus 26,996 Mcf with an average price of $4.24 per Mcf for the third
quarter of 2021. This represents an increase in net sales volume of 7,526 Mcf or
27.9% for the third quarter in 2022.
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Oil and natural gas lease operating expenses increased by $56,186 or 4.8%, to
$1,229,177 for the nine months ended September 30, 2022, from $1,172,991 for the
same period in 2021. This increase was mainly due to higher trucking and water
disposal costs due to increases in manpower and fuel costs from outside vendors.
For the third quarter in 2022, lease operating expenses decreased $43,421 or
9.5% from the same quarter in 2021 due mainly to lower outside plugging and
abandonment costs during the quarter in 2022 when compared to the same quarter
in 2021.
The aggregate of supervisory fees and other income was $24,349 for nine months
ended September 30, 2022, a decrease of $872 from $25,221 during the same period
in 2021. During the third quarter 2022, supervisory fees and other income
increased $189 or 2.7% when compared to the quarter in 2021.
Depreciation, depletion and amortization expense decreased to $301,235 from
$397,629, a decrease of $96,394 or 24.2% for the nine months ended September 30,
2022, as compared to the same period in 2021. During the third quarter 2022,
depreciation, depletion and amortization expenses also decreased $46,241 or
44.8%. The depletion rate is calculated using production as a percentage of
reserves. This decrease in depletion expense was due to an increase in expected
recoverable developed reserves which decreased the depletion rate. While
recoverable developed reserves increased, the company's Proved Undeveloped
reserves decreased as a result of a downward revision in the number and working
interest in undrilled wells.
At September 30, 2022, Royale Energy had a Deferred Drilling Obligation of
$10,084,011. During the first nine months of 2022, we removed $3,185,928 of
drilling obligations as we completed one oil well in Texas and participated in
completing the drilling of two oil wells in southern California, while incurring
expenses of $2,558,792, resulting in a gain of $627,136. At September 30, 2021,
Royale Energy had a Deferred Drilling Obligation of $4,922,439. During the first
nine months of 2021, we disposed of $1,841,061 of drilling obligations upon
completing the drilling of two oil wells in Texas, while incurring expenses of
$1,906,204, resulting in a loss of $65,143. Although these two wells were
originally drilled during the first quarter of 2021, we continued additional
work during second quarter 2021 to increase production.
General and administrative expenses decreased by $180,653 or 11.6% to $1,381,282
for the nine months ended September 30, 2022 from $1,561,935 for the same period
in 2021. For the third quarter 2022, general and administrative expenses
decreased $127,805 or 26.3% when compared to the same period in 2021. These
decreases were mainly due to lower employee related expenses and other
administrative cost reduction measures during the periods in 2022. For the first
nine months of 2022, marketing expenses increased $60,222 or 48.6% to $184,040,
compared to $123,818 for the first nine months of 2021. For the third quarter
2022, marketing expenses increased $8,398 or 20.3% when compared to the third
quarter in 2021. Marketing expense varies from period to period according to the
number of marketing events attended by personnel and their associated costs.
Legal and accounting expense increased to $440,130 for the nine-month period in
2022, compared to $338,870 for the same period in 2021, a $101,260 or 29.9%
increase. For the third quarter 2022, legal and accounting expenses increased
$30,850 or 49.1%, when compared to the third quarter in 2021. These increases
were primarily due to higher outside accounting fees mainly related to
conversion of our accounting software during the period in 2022.
During the nine months ended September 30, 2022, we recorded a gain of $422,614
on settlement of accounts payable for a reduced amount. During the nine months
ended September 30, 2021, we recorded a loss of $254,295 on the sale of certain
non-operated California properties, we also recorded a gain of $291,249 on the
sale of certain non-operated Texas properties. In both instances, these
non-operated properties were originally acquired during the merger with Matrix
and booked as Held for Sale at the end of 2020, this resulted in a net gain on
sale of assets of $36,954. During period in 2021, we also recorded a gain on
settlement of $12,071 mainly due to the payment by the SBA of the remaining
balance on our PPP loan obtained in 2020.
Bad debt expense for the nine months ended September 30, 2022 and 2021 were $0
and $187,348, respectively. Approximately $180,000 of the expenses in 2021 arose
from identified uncollectable receivables relating to our oil and natural gas
properties either plugged and abandoned or scheduled for plugging and
abandonment and our period end oil and natural gas reserve values. We
periodically review our accounts receivable from working interest owners to
determine whether collection of any of these charges appears doubtful. By
contract, the Company may not collect some charges from its Direct Working
Interest owners for certain wells that ceased production or had been sold during
the year, to the extent that these charges exceed production revenue.
Interest expense for the nine months ended September 30, 2022 and 2021, were
$6,548 and $6,857, respectively.
CAPITAL RESOURCES AND LIQUIDITY
At September 30, 2022, we had current assets totaling $10,057,496 and current
liabilities totaling $17,152,090, a $7,094,594 working capital deficit. We had
$624,767 in cash and $3,765,777 in restricted cash at September 30, 2022,
compared to $220,304 in cash and $4,002,500 in restricted cash at December 31,
2021.
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In accordance with ASC 480-10-S99 the Company reclassified the Series B
Convertible Preferred Stock from Permanent Equity to Mezzanine capital as a
result of the change in voting rights provided at the time it of issuance. For
more information, see Note 3 - Series B Convertible Preferred Stock.
At September 30, 2022, our other receivables, which consist of joint interest
billing receivables from direct working interest investors and industry
partners, totaled $471,416 compared to $413,133 at December 31, 2021, a $58,283
increase. This increase was mainly due to accounts receivables from direct
working interest owners for lease operating expenses for two wells that were
brought online during the period in 2022. At September 30, 2022, revenue
receivable was $308,263, a decrease of $56,887, compared to $365,150 at December
31, 2021, mainly due to lower net receivables during the third quarter in 2022.
At September 30, 2022, our accounts payable and accrued expenses totaled
$5,452,949 an increase of $292,465 from the accounts payable at December 31,
2021 of $5,160,484, which was mainly due to higher drilling costs and lease
operating costs during the period in 2022.
The Company has had recurring operating and net losses and cash used in
operations and the financial statements reflect a working capital deficiency of
$7,094,594 and an accumulated deficit of $88,031,685. These factors raise
substantial doubt about our ability to continue as a going concern. We
anticipate that our primary sources of liquidity will be from the sale of oil
and gas in the course of normal operations, the sale of oil and gas property,
sales of participation interest and possible issuance of debt and/or equity. If
the Company is unable to generate sufficient cash from operations or financing
sources, it may become necessary to curtail, suspend or cease operations, sell
property, or enter into financing transaction(s) on less favorable terms; any
such outcomes could have a material adverse effect on the Company's business,
results of operations, financial position and liquidity. Additionally,
management has, and plans to continue, to increase revenue and reduce overhead
and Lease Operating Expense (LOE) costs. Although, in recent months oil and gas
revenues have increased due to higher commodity prices, drilling and lease
operating expenses have also increased due to higher transportation costs,
manpower costs and manpower shortages. During the third and continuing into the
fourth quarter of 2022, the Company completed several successful workovers on
existing and new wells in its Texas Jameson field. The Company has commitments
to continue to drill and workover wells in the Texas Jameson field and is
participating in the redrill and completing of a Southern California well.
Operating Activities. Net cash used in operating activities totaled $1,331,314
and $2,336,587 for the nine months ended September 30, 2022 and 2021,
respectively. This difference in cash used was mainly due to higher drilling
prepayments made during the period in 2021 when compared to the period in 2022.
Investing Activities. Net cash provided by investing activities totaled
$1,598,227 and $2,160,234 for the nine months ended September 30, 2022, and
2021, respectively. During the nine-month period in 2022, we received
approximately $5.4 million in direct working interest investor turnkey drilling
investments while our drilling expenditures were approximately $3.8 million as
we drilled and completed one Texas well and participated in the drilling and
completing of two southern California oil wells, we also have drilling and
workovers in progress in our Texas Jameson field. During the nine-month period
in 2021, we received approximately $3.6 million in direct working interest
investor turnkey drilling investments while our drilling expenditures were
approximately $2.5 million in the drilling and completing of two Texas oil
wells. During the period in 2021, we also received approximately $1.0 million
for the sale of non-operated properties in Texas and California.
Financing Activities. Net cash used in financing activities totaled $99,173 and
$27,884 for the nine months ended September 30, 2022, and 2021, respectively.
During the periods in 2022 and 2021, the totals were used for principal payments
on our notes payable and financing lease payments.
Critical Accounting Estimates
Our critical accounting policies are further disclosed in Note 1 to the
consolidated financial statements included in our 2021 Annual Report on Form
10-K.
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ROYALE ENERGY, INC. 