GENERAL39208

• Permit No: M1982090
• IBM Index Class Name: General Documents
• Doc Name: ROYAL RESOURCES CORP ANNUAL REPORT 1986
• Annual Report Year: 1986
• Media Type: D
• Archive: No

Management's Dlscusslon and Analysts of Flnanclal Condltlon and Results of Operations
Results of Operations
Fiscal year ended June 30, 1986
In liscal 1986, the Company experienced a significant drop
in oil and gas revenues compared to the previous year. Oil
and gas revenues for fiscal 1986 were $4.U million as
compared to $7.9 million for the previous fiscal year. The
decrease in oil and gas revenues resulted from lower
production and, during the last half of the fiscal year, lower
prices which are described in more detail below. In addition,
because of a significant volumetric drop in oil and gas
reserves and the precipitous drop in oil and gas prices, the
Company wrote down the carrying value of its oil and gas
properties by $19.3 million during the fiscal year.
The Company reported a net loss of 415 million or
$2.44 per share in fiscal 1986 as compared to net income of
$1.8 million or $.30 per share in fiscal 1985. The current
fiscal year results excluding the write-clown of oil and gas
properties showed a net loss of $1.4 million. Facrors other
than the valuation write-clown contributing to the net loss
include:
1. A decrease In oil and gas production Irom 296,000
equivalent barrels BOE) to 212,000 BOE, a 28 percent
reduction from the previous yeas (An equivalent barrel
represents one barrel of oil ur 6 MCF of gasJ The decrease
occurred primarily in od production with a substantial part
of the decrease attributable to reduced production at the
Tulare Lake Field.
2. A decrease in the average price of oil from $2556
per barrel to $20.84 per barrel or a 18 percent reduction. At
June 30, 1986 the average price for oil was approximately
$12.00 per barrel.
3. A decrease in the average price of gas per MCF from
$3.16 to $2.45 or a 22 percent reduction. AI lure 30, 1986
the average price for gas was approximately $2.18 per MCF.
4. An Increase in the unit charge per BOE for depletion,
depreciation and amortization (DD s'; A) from $9.60 BOE to
$13.00 BOE or a 35 percent increase. This increase resulted
because the Company has a smaller oil and gas reserve base
over which the cost of oil and gas properties is amortized.
Thi, charge would have been greater without the write-
dov,~n.
5. Production costs per equivalent unit were $6.15 in
1986 compared to $5.92 in 1985. In addition workover
expense in 1986 amounted to $3.06 BOE thus providing a
total production and workover cost of $9.21 BOE. For a
discussion of factors contributing to this increase, see
"Impact of Changing Prices and Operating Costs" below.
Although general and administrative expenses increased
Irom $1.5 million in 1985 ro $lb million in 1986, the
Company decreased its general and administrative expenses
related to oil and gas activities after the early 1986 break in
oil prices m an effort to offset a portion of the effect of the oil
price reductions. During the last half of the fiscal year, the
Company devoted a significant amount of time and expense
to cLversi(ication into gold mining ventures.
Interest and other income for fiscal 1986 amounted to
$311,000 compared to $706,000 for the preceding fiscal
yeas The decrease in interest and other earnings reflect the
decrease in the Company's working capital and funds
available for inveshnent as well as lower interest rates.
The income tax benefit for the current year of $6.4
million resulted from the elimination of the accumulated
deferred tax balance at the beginning of the fiscal year clue
primarily to the wnte-down in the carrying value of oil and
gas properties. This tax benefit for the current year compares
to an income tax provision of $864,000 or 32 percent of pre-
tax income lur the previous fiscal year.
During the current fiscal yeas the Company added
approximately 39,000 equivalent barrels of oil ro the
Company's oil and gas reserves from new discoveries.
Approximately 16,000 additional equivalent barrels were
added from the purchase of producing properties.
The Company's proved oil and gas reserves at tune 30,
1986 were estimated to be approximately 260,000 barreb of
oil and 5.4 million MCF of gas. Production for the current
year of approximately 92,000 barrels of oil and 717,000 MCF
of gas and dowmvard revisons in oil and gas reserve
estimates greatly exceeded additions to resen~es from new
discoveries and purchases. The Company's proved reserves
decreased 590.000 I» rrels u( oil from the 1150,000 ban~els of
oil at lure 30, 1985. Most o(this decrease is attributed to the
decrease m estimated reserves at the Tulare Lake Field.
Proved gas reserves decreased 2.1 million MCF from the 7.5
million MCF at lure 30, 1985.
Estimated future net revenues from prrn-ed oil and gas
reserves decreased from $34.5 million as of lure 30, 1985 to
$11.1 million as of June 30, 1966. This $Z3.4 million net
decrease resulted primarily from decreases in oil and gas
prices at June 30, 1986 as compared to prices at lure 30,
1985 as well as the decrease in oil and gas reserve volumes
described above. At the end of the current year, the average
net revenue estimated per BOE was approximately $9.57 as
compared to $16.37 at June 3Q 1985.
During the year 56,000 BOE +vere produced from the
Tulare Lake Field. At year end, producible oil and gas
reserves for this field were estimated at approximately
182,000 BOE, compared to 600A00 BOE at the beginning of
the year. Workovers attempted during the year were generally
not successful with the result oil and gas reserve estimates
were revised downward at year encl. Currently the operator,
Shell Oil Company, is reviewing additional +vorkover activity
and has proposed a workover costing about $ 30,000 net In
the Company.
The Company expended $2.5 million during fiscal 1986
to acquire, explore and develop its oil and gas properties as
compared 10 $9.8 million during 1985. During the year eight
gross (1.056 net) development wells and four gross (.385)
exploratory wells were brought onto produdiun.
Fiscal year ended June 30, 1985
In fiscal 1985 the Company experienced a significant drop in
oil and gas revenues compared to the previous year. Oil and
gas revenues for fiscal 1985 were $7.8 million as compared
to $14.4 million for the previous fiscal year. Production
problems in the Boswell sand in the Tulare Lake Field caused
oil and gas sales from that field in fiscal 1985 to be $4?