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
In late 2019 and continuing into 2020, there was a global outbreak of novel
coronavirus (COVID-19) that has resulted in changes in global supply and demand
of certain mineral and energy products. While the direct and indirect negative
impacts that may affect the Company cannot be determined, they could have a
prospective material impact. For more information, see Item 3 below.
For the nine months ended September 30, 2020, we had a net loss of $540,251
compared to the net loss of $800,566, during the nine months ended September 30,
2019. The difference was primarily the result of a loss of $1.2M on sale of
assets recorded during the first quarter of 2019 and there was no comparative
loss in the current year period. We also had a $532,510 gain relating to our
equity method investment in RMX recorded during the nine months ended September
30, 2020, compared to a loss of $124,716 recorded during the nine months ended
September 30, 2019. The gain in RMX during the current period was primarily due
to their hedging activities. Our net loss for the third quarter of 2020 was
$612,229, while in the third quarter of 2019 the net income was $2,304,108,
mainly due increased Turnkey drilling activity during the third quarter of 2019,
as we drilled four wells during that quarter. Total revenues for the first nine
months of 2020 and 2019 were $1,169,110 and $2,030,792, respectively.
During the first nine months of 2020, revenues from oil and gas production
decreased $281,976 or 19.9% to $1,137,845 from the 2019 first nine months
revenues of $1,419,821. This decrease was mainly due to lower oil and natural
gas commodity prices as demand decreased due to federal and state government
stay-at-home orders. The net sales volume of oil and condensate for the nine
months ended September 30, 2020, was approximately 23,432 barrels with an
average price of $37.34 per barrel, versus 14,851 barrels with an average price
of $56.03 per barrel for the first nine months of 2019. This represents an
increase in net sales volume of 8,581 barrels or 57.8%. The net sales volume of
natural gas for the nine months ended September 30, 2020, was approximately
121,097 Mcf with an average price of $2.17 per Mcf, versus 198,439 Mcf with an
average price of $2.96 per Mcf for the same period in 2019. This represents a
decrease in net sales volume of 77,342 Mcf or 39.0%. The decrease in natural gas
production volume was due to certain wells that were offline and waiting on
workovers and to lower volumes on existing wells due to natural declines. For
the quarter ended September 30, 2020, revenues from oil and gas production
decreased $58,581 or 9.6% to $551,846 from the 2019 third quarter revenues of
$610,427. This decrease was also due to lower commodity prices and wells that
were offline and waiting on workovers. The net sales volume of oil and
condensate for the quarter ended September 30, 2020, was approximately 11,933
barrels with an average price of $40.03 per barrel, versus 8,222 barrels with an
average price of $57.31 per barrel for the third quarter of 2019. This
represents an increase in net sales volume of 3,711 barrels or 45.1% for the
third quarter in 2020. The net sales volume of natural gas for the quarter ended
September 30, 2020, was approximately 38,057 Mcf with an average price of $1.94
per Mcf, versus 62,553 Mcf with an average price of $2.23 per Mcf for the third
quarter of 2019. This represents a decrease in net sales volume of 24,496 Mcf or
39.2% for the quarter in 2020.
Oil and natural gas lease operating expenses decreased by $74,357 or 6.0%, to
$1,163,428 for the nine months ended September 30, 2020, from $1,237,785 for the
same period in 2019. For the third quarter in 2020, lease operating expenses
decreased $132,957 or 25.7% from the same quarter in 2019. These were both lower
due to decreases in workover costs and outside operated lease operating costs as
certain non-operated wells were offline and waiting on workovers.
The aggregate of supervisory fees and other income was $31,265 for nine months
ended September 30, 2020, a decrease of $579,706 from $610,971 during the same
period in 2019. The decrease was mainly due to the cancellation of the service
agreement with RMX Resources as of March 31, 2019. During the third quarter
2020, supervisory fees and other income decreased $14,652 or 58.7% when compared
to the quarter in 2019, due to lower pipeline and compressor fees due to the
decrease in natural gas production and lower interest income received on cash
deposits.
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Depreciation, depletion and amortization expense increased to $249,492 from
$217,327, an increase of $32,165 or 14.8% for the nine months ended September
30, 2020, as compared to the same period in 2019. During the third quarter 2019,
depreciation, depletion and amortization expenses also increased $1,397 or 1.5%.
The depletion rate is calculated using production as a percentage of reserves.
This increase in depreciation expense was due to the increase in oil production
and wells and related equipment due to drilling activity in 2019 and the first
nine months of 2020.
At September 30, 2020, Royale Energy had a Deferred Drilling Obligation of
$3,870,774. During the first nine months of 2020, we disposed of $4,386,901 of
drilling obligations upon completing the drilling of three oil wells, one in
California and two wells in Texas, while incurring expenses of $3,358,206,
resulting in a gain of $1,028,695. At September 30, 2019, Royale Energy had a
Deferred Drilling Obligation of $6,077,583. During the first nine months of
2019, we disposed of $9,382,519 of drilling obligations upon completing the
drilling of eight wells, six natural gas wells in Northern California and two
oil wells in Southern California, while incurring expenses of $7,484,260,
resulting in a gain of $1,898,259.
General and administrative expenses decreased by $80,284 or 4.8% from $1,660,921
for the nine months ended September 30, 2019, to $1,580,637 for the same period
in 2020. This decrease was mainly due to lower employee related costs and
outside consulting services, in an effort by the Company to reduce costs. For
the third quarter 2020, general and administrative expenses increased $147,278
or 41.1% when compared to the same period in 2019. This increase was mainly due
to higher drilling overhead offsets during the third quarter of 2019 as four
wells were completed. Marketing expense for the nine months ended September 30,
2020, decreased $233,405, or 73.0%, to $86,501, compared to $319,906 for the
same period in 2019. For the third quarter 2020, marketing expenses decreased
$127,929 or 80.3% when compared to the third quarter in 2019. Marketing expense
varies from period to period according to the number of marketing events
attended by personnel and their associated costs. During the period in 2020
fewer marketing events were attended as the governmental mandate against large
gatherings was implemented.
Legal and accounting expense decreased to $238,124 for the nine month period in
2020, compared to $502,995 for the same period in 2019, a $264,871 or 52.7%
decrease. For the third quarter 2020, legal and accounting expenses decreased
$50,727 or 44.4%, when compared to the third quarter in 2019. These decreases
were primarily due to higher accounting fees related to the Matrix post-merger
reporting incurred during the period in 2019.
During the nine months ended September 30, 2020, we recorded a gain of $532,510,
on investment in joint venture as our 20% share of RMX Resources, LLC's,
compared to a loss of $124,716 in 2019. During the third quarter in 2020, we
recorded a gain of $271,310 based on the contract agreement with an industry
partner in the drilling of two wells. During the second quarter in 2020 we
recorded a gain of $200,001 on the receipt of a pre-Matrix merger prepayment
refund. During the first quarter in 2020, we recorded a loss on settlement of
$31,500 related to a 2018 seismic sales agreement. During the first quarter in
2019 we recorded a loss on the sale of assets of $1,237,126 related a settlement
agreement with RMX Resources, LLC. During the nine-month period in 2019, we
recorded geological and geophysical expense of $263,277 related mainly to the
acquisition of a seismic survey of a Northern California field, during the same
period in 2020, we recorded $14,392 in geological and geophysical expenses.
During the nine months ended September 30, 2019, we recorded a gain of $897,708,
mainly on the reconciliation and settlement of royalties payable. We
periodically review our proved properties for impairment on a field-by-field
basis and charge impairments of value to the expense. During the nine months
ended September 30, 2019, we recorded a lease impairment of $40,223 on various
lease and land costs that were no longer viable.
Bad debt expense for the periods ended September 30, 2020, and 2019 were
$368,417 and $5,863, respectively. During the period in 2020 approximately
$203,000 was related to revenue receivable from an industry partner whose
collectability was in doubt. Approximately $154,000 of the expenses in 2020
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 decreased to $10,306 for the nine months ended September 30,
2020, from $17,186 for the same period in 2019, a $6,880 decrease. This decrease
was mainly due to lower principal balances on notes payable during the nine
month period in 2020.
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Capital Resources and Liquidity
At September 30, 2020, we had current assets totaling $5,509,472 and current
liabilities totaling $9,985,434, a $4,475,962 working capital deficit. We had
$558,249 in cash and $1,825,000 in restricted cash at September 30, 2020,
compared to $1,031,014 in cash and $2,845,515 in restricted cash at December 31,
2019.
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, 2020, our other receivables, which consist of joint interest
billing receivables from direct working interest investors and industry
partners, totaled $1,402,631, compared to $1,189,892 at December 31, 2019, a
$212,739 increase. This increase was mainly due to an increase in receivable
from an industry partner for drilling costs incurred during the period in
2020. At September 30, 2020, revenue receivable was $345,336, a decrease of
$243,815, compared to $589,151 at December 31, 2019, due to lower commodity
prices and lower natural gas production volumes on existing wells. At September
30, 2020, our accounts payable and accrued expenses totaled $4,963,091, a
decrease of $1,067,943 from the accounts payable at December 31, 2019 of
$6,031,034, which was related to payments made on account during the period in
2020.
The Company has had recurring operating and net losses and cash used in
operations and the financial statements reflect a working capital deficiency of
$4,475,962 and an accumulated deficit of $74,496,606. 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.
Operating Activities. Net cash used by operating activities totaled $645,657 and
$1,311,478 for the nine months ended September 30, 2020, and 2019,
respectively. This difference in cash used was mainly due to a loss on the sale
of assets during the first quarter in 2019 and the decrease in prepaid drilling
in 2020 as they were applied to actual costs.
Investing Activities. Net cash used by investing activities totaled $992,429
compared to $1,826,433 provided for the nine months ended September 30, 2020,
and 2019, respectively. During the period in 2020, we received approximately $3
million in direct working interest investor turnkey drilling investments while
our drilling expenditures were approximately $4 million in the drilling and
completing of one Southern California oil well and two Texas oil wells. During
the 2019 period, we received approximately $9.2 million in direct working
interest investor turnkey drilling investments while our drilling expenditures
were approximately $7.4 million in the drilling and completing of six Northern
California natural gas wells and two Southern California oil wells.
Financing Activities. Net cash provided by financing activities totaled $144,806
compared to net cash of $522,231 used for the nine months ended September 30,
2020, and 2019, respectively. During the period in 2020, we received $207,800 in
PPP loan as discussed in Note 7. There were principal payments of approximately
$63,000 on our notes payable. During the nine month period in 2019, a financing
agreement for a seismic survey was recognized when the terms were finalized, on
which there were principal payments of approximately $131,000. Additionally, in
2019, there were principal payments of approximately $391,000 on our note with
Forza Operating.
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