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

million as compared to $10.9 million the poor fiscal year.
The production problems have caused a downward revision
in the estimated oil and gas reserves. Oil and gas revenue for
properties other than Tulare amounted to $3.6 million in
fiscal 1985. This compares ro $3.5 million for fiscal 1984.
The Company reported a net income of $1.ti million or
$.30 per share in fiscal 1985 as compared to net income of
$3.9 million or $.66 per share in fiscal 1984. Pnntary factors
contributing to the decrease in net income are a decrease in
oil and gas net operating revenue of 50 percent and an
increase of 50 percent in the charge per eyuivalf:nt unit for
depreciation, depletion and amortization of oil and gas
properties.
Oil and gas net operating revenues (revenues less
operating expenses and taxes) for fiscal 1985 were $6.1
million as compared to $12.0 million for fiscal 1984
primarily because of the decrease in oil and gas revenue
from Tulare Lake. The fiscal 1985 average sales price per
barrel of oil decreased from the fiscal 1984 average by
approximately four percent and the average sales price per
MCF of gas decreased approximately IS percent. Oil sales for
fiscal 1985 were 177,95 i barrels as compared l0 345,U04
barrels fur fiscal 198x. Gas sales for fiscal year 1985 were
707,216 MCF as compared to 1,269,334 MCF for fiscal 198-1.
Production cost per equivalent unit (one barrel of oil for
six MCF of gall was $5.92 in 1985. This compares to $4.07
in 1984 or a 45 percent increase in unit costs. This unit cost
increase resulted primarily from lower production and a
corresponding increase in the unit cost of operations at the
Tulare Lake Field as well as significant wurkover expenses at
Tulare. In addition properly taxes for Tulare increased
substantially.
Depreciation, depletion and amortization IDD ~\ A) of
oil and gas properties amounted Io $2.7 million for 1985,
which was $9.61 per eyuilavenl unit compared to $6.38 fur
1984. This increase resulted from amortizing the full cost
pool from a lower estimated reserve base and represented a
SO percent increase from the fiscal 1984 DD & A charge per
equivalent unit.
General and administrative expenses in 1985 were $1.5
million as compared to $1.3 million for the preceding year.
Interest expense in fiscal year 1985 amounted to
$46,000. A portion of the interest expense relates to the
borrowing of $330,000 to purchase an increasetd interest in
the Company's Lake Boeuf properties in Louisiana. Interest
and other income for fiscal 1985 amounted to $706,000
compared to $331,0110 for 1984. The Company was able to
increase its financial income because there were more funds
to invest than in the prior year and because of efforts to
improve the yield. The Company also realized a gain of
$47.1,000 in liscal 1985 from [he sale of its Canadian
properties.
Income tax for 1985 was $864,000 or 32 percent of pre-
tax income. Income tax for 1984 was $3.4 million or
46 percent of pre-tax income. The effectroe income tax rate
decreased for fiscal 1985 as compared fo fiscal 1984
because:
1. Statutory depletion in excess of tax basis prowled a
rate reduction of approximately 21 percent in 1985
compared to five percent in 1984.
2. The impact of the difference bet+veen the tax basis
and the financial reporting basis of the Company's oil and
gas properties increased the effective tax rate by nine percent
as compared to 12 percent last year. This difference which
totalled $9 million at the inception of the Company has been
amortized to approximateh~ $3 million. This balance will
cause the income tax rate to be higher than it would
otherwise be until fully amortized.
All of the Company's tax expense was deferred except
for $119,000 which consists of an estimated $200.000 owing
on the gain from sale vi Canadian properties ousel by a
refund due on LCS. taxes of $81,000. The deferral of
$745,000 0l income taxes results from the charge off for tax
purposes of intangible drilling and other similar costs offset
by current tax liability generated by current taxes due
because of the excess of book over tax depreciation and the
taxing of partnership income in fiscal 1985 which was
reported in a different year for financial reporting purposes.
The Company's exploration and development efforts
added approximately 730,000 equivalent barrels o(oil (BOE)
to the Company's non-Tulare oil and gas reserves during the
twelve months ended tune 30, 1985. This represented a
substantial increase in non-Tulare reserves during the year. In
addition, the Company purchased an additional interest in
the Lake Boeu( property resulting in an increase of
approximately 100,000 BOE. Overall reserves were down
about 18 percent from fiscal 1984 year end reserves of 2.9
million BOE l0 2.1 million BOE after production of 295,822
BOE anti sale of 26,832 BOE from the Companyb Canadian
properties. The Company's Tulare Lake Field production
problems have resulted in a downward revision in that field's
oil and gas reserve estimates from the liscal 1984 year end
estimate of 2.1 million BOE to .6 million BOE at the end of
fiscal 1985.
The Curnpany's proved oil and gas reserves at June 30,
1985 were estimated to be approximately 850,000 barrels of
oil and 7.5 million MCF of gas. The Company's proved
reserves showed a net decrease of 830,000 barrels of oil
from the 1.7 million barrels of oil at June 30, 1984 and a net
increase of 40U,000 MCF of gas from 7.1 million n1CF of gas
at June 30, 1984. These changes occurred as a result of the
Tulare Lake downward revision in estimated reserves and
production for the current year of 177,953 barrels of oil and
707,216 MCF of gas. In addition, Canadian reserves of 1,615
barrels of oil and 151,244 MCF of gas were sold and
additional reserves of 14,19? barrels of oil and 542,328 MCF
of gas were purchased at Lake Boeuf.
Estimated future net revenues from proved reserves
decreased from $66,8 million as of lone 30, 198-} to $34.5
million as of lone 30, 1985. This $32.3 million net decrease
results from the downward revision of Tulare reserves, a
decrease in oil and gas prices, net operating revenue of $G.I
million from fiscal 1985 production and the sale of Canadian
reserves with net revenue estimates of $500,000, The
estimated future net revenue from reserve additions during
the year approximated $13 million and were included in the
current estimate of future net revenues as of June 30, 1985.
The Company expended $9.8 million during fiscal 1985
to acquire, explore and develop its oil and gas properties as
compared to $9.9 million expended during 1984. In 1985
approximately 33 percent of these expenditures related to the
Tulare Lake Field as compared lu 40 percent of such capital
expenditure in fiscal 1984.
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