10-K: Royale Energy Inc. Reports Decreased Reserves and Net Loss in 2023 Annual Filing

Royale Energy Inc.'s 2023 annual report reveals a net loss of $1.83 million and a significant decrease in both oil and natural gas reserves.

Summary

• Royale Energy Inc. reported a net loss of $1.83 million for the year ended December 31, 2023, compared to a net loss of $145,594 in 2022.
• Total revenues decreased by 18.2% to $2.16 million, primarily due to lower oil and natural gas commodity prices.
• Operating expenses increased by 21.8% to $6.21 million, mainly due to higher lease impairments.
• The company's oil reserves decreased by 41.5%, and natural gas reserves decreased by 58.2% compared to the previous year.
• Royale's estimated total reserves were approximately 1.8 BCFE at December 31, 2023, down from 3.4 BCFE in 2022.
• The net reserve value of proved developed and undeveloped reserves was approximately $10.7 million at December 31, 2023.
• The standardized measure of discounted future net cash flows was estimated to be $4.47 million at December 31, 2023.
• Approximately 98% of Royale's total revenue for 2023 came from sales of oil and natural gas, totaling $2.11 million.
• The company reported a gain on turnkey drilling of $2.11 million for 2023, compared to $1.73 million in 2022.
• Royale drilled one well and participated in the drilling of three wells in 2023, with two being commercially productive and one being a dry hole.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to significant losses, decreased reserves, and concerns about the company's ability to continue as a going concern. While there are some positive aspects, the overall tone is concerning from an investment perspective.

Positives

• Royale reported a gain on turnkey drilling of $2.11 million for 2023, an increase from $1.73 million in 2022.
• The company successfully completed two commercially productive wells out of the four wells drilled or participated in during 2023.
• Lease operating expenses decreased by 10.2% to $1.73 million due to water disposal recovery fees.
• General and administrative expenses decreased by 4.6% to $1.73 million due to cost reduction measures.
• The company's policy is to offer investors in a successful well the right to participate in subsequent wells at the same percentage level.

Negatives

• Royale experienced a significant net loss of $1.83 million in 2023, compared to a loss of $145,594 in 2022.
• Total revenues decreased by 18.2% to $2.16 million due to lower oil and natural gas commodity prices.
• The company's oil reserves decreased by 41.5% and natural gas reserves decreased by 58.2% compared to the previous year.
• Royale recorded lease impairments of approximately $1.6 million on lease and land costs in California.
• The company has a working capital deficiency of $7.18 million and a stockholders deficit of $35.63 million.
• There is substantial doubt about the company's ability to continue as a going concern.
• The company's internal control over financial reporting was not effective as of December 31, 2023, due to a material weakness.

Risks

• The company faces substantial doubt about its ability to continue as a going concern due to recurring losses and a working capital deficiency.
• Royale's financial performance is highly dependent on volatile oil and natural gas prices.
• The company's operations are subject to intense competition in the oil and gas industry.
• The implementation of California Senate Bill No. 1137, if not overturned by the November 2024 referendum, could limit future drilling efforts.
• The company's internal control over financial reporting was not effective as of December 31, 2023, due to a material weakness.
• There is a risk of losses resulting from title defects or defects in the assignment of leasehold rights.
• The company is subject to various federal and state laws and regulations to protect the environment, which could increase costs.

Future Outlook

Royale plans to increase oil and gas revenue with commitments to participate in the drilling and completion of several non-operated wells in the Permian Basin in Texas. The company is also exploring commitments to provide additional financing to support future operations.

Management Comments

• Management believes that its stockholders are better served by diversification of its investments among individual drilling prospects.
• Management has established, and is responsible for, internal controls designed to provide reasonable assurance that the estimates of Proved Reserves are computed and reported in accordance with rules and regulations promulgated by the SEC.
• Management plans to alleviate the going concern by implementing cost control measures that include the reduction of overhead costs and through the sale of non-strategic assets, and if necessary seek additional debt and/or equity financing.

Industry Context

The oil and gas industry is intensely competitive, and Royale faces competition from larger producers and other investment entities. Market factors, including domestic production, imports, global demand, and political events, significantly affect the company's operations. The company's performance is also influenced by regulatory changes, including environmental and energy conservation laws.

Comparison to Industry Standards

• Royale's decrease in reserves is significant compared to industry averages, indicating potential challenges in future production.
• The company's net loss and working capital deficiency are concerning, as many oil and gas companies are currently experiencing strong financial performance due to high commodity prices.
• The company's reliance on turnkey drilling agreements is a common practice for smaller oil and gas companies to reduce risk, but the gains are not always consistent.
• The company's lifting costs of $6.60 per MCFE are within the range of industry standards, but the decrease from $7.93 in 2022 is notable.
• The company's internal control weaknesses are a concern, as most public companies in the oil and gas sector have robust internal controls.

Related Party Transactions

• Our Chief Executive, Johnny Jordan, has accrued certain unpaid salaries, which were assumed by the Company. At December 31, 2023 Mr. Jordan was owed $46,926 in accrued unpaid guaranteed payments.
• At December 31, 2023, the Company had a receivable balance of $18,495 due from Stephen Hosmer and $7,654 from Donald Hosmer for normal drilling and lease operating expenses.
• At December 31, 2023, the Company had a total payable of $23,087 due to RMX and its subsidiary, Matrix Oil Corporation, related to certain lease operating expenses for wells operated by RMX.
• At December 31, 2023, the Company had prepaid expenses of $382,520 primarily for future plugging and abandonment costs for wells operated by RMX.
• During 2023, RMX Resources LLC operated various oil wells the company has interests in, from which the company received revenues of approximately $374,000 and incurred lease operating costs of approximately $181,000.
• At December 31, 2023, the company had a total payable of $164,669 owed to current and former board members for directors fees.
• The company had outstanding accrued unpaid guaranteed payments for unpaid salaries for periods predating their joining the Company due to certain former Matrix employees. At December 31, 2023, the balance due was $1,616,205.
• At December 31, 2023, the company also had accrued unpaid liabilities of $1,306,605 due to certain former Matrix employees for periods predating their joining the Company.

Stakeholder Impact

• Shareholders face significant risk due to the company's net loss, decreased reserves, and going concern uncertainty.
• Employees may be affected by cost reduction measures and potential restructuring.
• Customers may experience uncertainty due to the company's financial instability.
• Suppliers and creditors face increased risk of non-payment due to the company's financial challenges.

Next Steps

• The company plans to increase oil and gas revenue with commitments to participate in the drilling and completion of several non-operated wells in the Permian Basin in Texas.
• The company is exploring commitments to provide additional financing to support future operations.
• The company will continue to monitor and remediate the material weakness in its internal control over financial reporting throughout 2024.
• The company will await the results of the November 2024 referendum in California regarding Senate Bill No. 1137.

Key Dates

Keywords

oil and gas, reserves, production, drilling, turnkey drilling, financial results, impairment, lease operating expenses, working interest, commodity prices