Royale Energy, Inc.

Royale Energy, Inc. is an independent oil and natural gas producer operating in the exploration, development, and production of oil and natural gas reserves, with principal lines of business including 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. The company's operations are concentrated in Mitchell County and Ector County, Texas, the Sacramento Basin and San Joaquin Basin in California, and Oklahoma, with an overriding royalty interest in a non-producing well in Alaska. The industry is characterized by intense competition, and Royale encounters competition from other oil and natural gas producers as well as from other entities that invest in oil and gas for their own account or for others, many of which are substantially larger than Royale. Market factors affecting the quantities and prices of oil and natural gas production include the extent of domestic production, the level of imports of foreign oil and natural gas, general market demand on a regional, national and worldwide basis, domestic and foreign economic conditions, political events in foreign oil-producing regions, and variations in governmental regulations including environmental, energy conservation, and tax laws.

Royale Energy encounters competition from other oil and natural gas producers, as well as from other entities that invest in oil and gas for their own account or for others, and many of these companies are substantially larger than Royale. The company's competitive approach involves selling a portion of the working interest in each well it drills or participates in to reduce its drilling risk by owning a diversified inventory of properties with less of its own funds invested in each drilling prospect, and it generally sells working interests in its prospects to accredited investors in securities offerings exempt from registration. Royale believes its stockholders are better served by diversification of its investments among individual drilling prospects, and through its private placement sale of working interest in certain oil and gas properties, it can acquire interests and develop oil and natural gas properties with greater diversification of risk while still receiving an interest in the revenues and reserves produced from these properties. The company's estimated total proved reserves were approximately 949,727 and 304,200 BOE at December 31, 2025 and 2024, respectively, and the net reserve value of its proved developed and undeveloped reserves was approximately $20.5 million at December 31, 2025, based on the average West Texas Intermediate price of $66.01 per barrel for oil, and the average Henry Hub natural gas spot price of $3.39 per MCF for gas.

Royale Energy generates revenue primarily through 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. The company's revenue model is a mix of recurring income from oil and gas production and transactional income from turnkey drilling programs and the sale of fractional working interests. Approximately 99% of Royale’s total revenue for the year ended December 31, 2025, came from sales of oil and natural gas from production of its wells in the amount of $1,926,442 ¹, and in 2024, this amount was $2,246,073 ², which represented 99% of Royale’s total revenues for the respective periods presented. The company sells a portion of the working interest in each well it drills or participates with third-party participants and retains a portion of the prospect for its own account, which allows Royale to reduce its drilling risk by owning a diversified inventory of properties with less of its own funds invested in each drilling prospect. Royale generally sells working interests in its prospects to accredited investors in securities offerings exempt from registration, and the prospects are typically bundled into multi-well investments to permit third-party investors to diversify their investments. The company also generates revenue from turnkey drilling programs, where it records a gain if total funds received to drill a well exceed the actual cost to drill those wells, and from operator fees and expense reimbursements from the owners of fractional interests in the wells it operates.

Royale Energy'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. The company's oil and natural gas production is its primary revenue source, with approximately 99% of total revenue for the year ended December 31, 2025, coming from sales of oil and natural gas from production of its wells in the amount of $1,926,442 ³. In 2024, this amount was $2,246,073 ⁴, which also represented 99% of total revenues. The company's oil and natural gas production is broken down into oil and condensate sales, natural gas sales, and NGL sales. For the year ended December 31, 2025, oil and condensate sales were $1,664,862 ⁵, natural gas sales were $257,684 ⁶, and NGL sales were $3,896 ⁷. For the year ended December 31, 2024, oil and condensate sales were $2,010,742 ⁸, natural gas sales were $231,765 ⁹, and NGL sales were $3,566 ¹⁰. The net sales volume of oil and condensate for the year ended December 31, 2025 was approximately 25,976 barrels of oil with an average price of $64.23 ¹¹ versus approximately 26,570 barrels with an average price of $72.83 ¹² per barrel in 2024. The net sales volume of natural gas for the year ended December 31, 2025 was approximately 117,219 Mcf with an average price of $2.20 ¹³ per Mcf, versus 116,406 Mcf with an average price of $1.94 ¹⁴ per Mcf for the year in 2024. The company also generates revenue from turnkey drilling programs, reporting a gain on turnkey drilling in connection with the drilling of wells on a turnkey contract basis in the amount of $1,322,149 ¹⁵ for the year ended December 31, 2025, and $1,607,677 ¹⁶ for the year ended December 31, 2024. Additionally, Royale charges overhead from the operation of the wells, and for the year ended December 31, 2025, it charged overhead in the amount of $441,965 ¹⁷, which were an offset to general and administrative expenses, compared to $430,680 ¹⁸ in 2024.

On September 3, 2025, the Company, through its wholly-owned subsidiary Royale Energy Funds, Inc, acquired certain non-operated working and net revenue interests in seven gross (0.189 net) producing horizontal wells and approximately 382.9 net acres of associated leasehold acreage within the Pradera Fuego project from Pradera Fuego, LP effective July 1, 2025, for total consideration of $1.5 million ¹⁹ in cash. The acquisition was financed through a combination of $1.0 million ²⁰ of cash on hand and an increase in its existing borrowings of additional $500,000 ²¹. During its fiscal year ended December 31, 2025, Royale participated in the drilling of one gross (0.0035 net) wells, which was commercially productive. The company reported a gain on turnkey drilling in connection with the drilling of wells on a turnkey contract basis in the amount of $1,322,149 ²² for the year ended December 31, 2025, and for the year ended December 31, 2024, Royale reported a gain on turnkey drilling in the amount of $1,607,677 ²³. During 2025, Royale removed $2,755,500 ²⁴ of drilling obligations as it participated in drilling and completion of one gross (0.0035 net) successful oil well in the Texas Permian basin, while incurring expenses of $1,433,351 ²⁵, resulting in a gain of $1,322,149 ²⁶. During 2024, Royale removed $6,562,721 ²⁷ of drilling obligations as it participated in drilling and completion of four gross (0.0722 net) successful oil wells in the Texas Permian basin, while incurring expenses of $4,955,044 ²⁸, resulting in a gain of $1,607,677 ²⁹. The company also recorded a gain on settlement of asset retirement obligation liability of $18,710 ³⁰ during 2025 due mainly to finalizing the plugging and abandonment of three natural gas sites in California. During 2025 and 2024, Royale recorded impairments of $27,250 ³¹ and $400,719 ³², respectively, on various lease and land costs in its California natural gas fields where the carrying value exceeded the fair value. During 2025 and 2024, Royale also recorded Credit Loss expenses of $137,221 ³³ and $450,743 ³⁴, respectively, which arose from identified uncollectable receivables relating to its oil and natural gas properties either plugged and abandoned or scheduled for plugging and abandonment and its period end oil and natural gas reserve values.

For the year ended December 31, 2025, Royale Energy incurred a net loss of $1,251,680 ³⁵ compared to a net loss of $2,159,016 ³⁶ during 2024. Total revenues from operations in 2025 were $1,947,203 ³⁷, a decrease of $315,136 ³⁸ or 13.9% ³⁹, from the total revenues of $2,262,339 ⁴⁰ in 2024, mainly due to lower oil prices during 2025. Total expenses for operations in 2025 were $4,183,060 ⁴¹ a decrease of $1,605,127 ⁴² or 27.7% ⁴³, from total expenses of $5,788,187 ⁴⁴ in 2024, mainly due to lower lease operating expenses, lease impairments and credit loss expenses during 2025. Revenues from oil and gas production decreased $319,631 ⁴⁵ or 14.23% ⁴⁶ to $1,926,442 ⁴⁷ from 2024 revenues of $2,246,073 ⁴⁸, mainly due to lower oil commodity prices during 2025. Oil and natural gas lease operating expenses decreased by $659,840 ⁴⁹ or 33.3% ⁵⁰, to $1,323,333 ⁵¹ for the year ended December 31, 2025, from $1,983,173 ⁵² for the year in 2024. General and administrative expenses decreased by $1,637 ⁵³ or 0.1% ⁵⁴ from $1,633,740 ⁵⁵ for the year ended December 31, 2024, to $1,632,103 ⁵⁶ in 2025. Interest expense for the year ended December 31, 2025 and 2024, was $404,051 ⁵⁷ and $304,873 ⁵⁸, respectively. At December 31, 2025, Royale had current assets totaling $10,510,193 ⁵⁹ and current liabilities totaling $22,061,032 ⁶⁰, an $11,550,839 ⁶¹ working capital deficit. The company had cash and cash equivalents at December 31, 2025 of $1,099,044 ⁶² and restricted cash of $7,175,950 ⁶³ compared to cash and cash equivalents of $1,877,163 ⁶⁴ and restricted cash of $6,025,000 ⁶⁵ at December 31, 2024. For the years ended December 31, 2025 and 2024, cash used in operating activities totaled $2,699,820 ⁶⁶ and $2,362,855 ⁶⁷, respectively. Net cash provided by investing activities totaled $2,584,264 ⁶⁸ and $3,344,120 ⁶⁹ for the years ended December 31, 2025 and 2024, respectively. Net cash provided by financing activities totaled $488,387 ⁷⁰ and $1,393,377 ⁷¹ for the years ended December 31, 2025 and 2024, respectively.

A primary growth vector for Royale Energy is the continued development of its oil and natural gas properties in Texas, particularly in Mitchell County and Ector County. The company's estimated total proved reserves increased significantly, with overall proved developed and undeveloped oil reserves increasing by 171.1% ⁷² and overall proved developed and undeveloped natural gas reserves increasing by 362.3% ⁷³ during 2025. This upward revision was mainly the result of an increase in proved undeveloped oil reserves from drilling locations which the Company had previously estimated, with the upward revision in oil reserve quantities being approximately 107 thousand barrels ⁷⁴ and the upward revision in natural gas reserve quantities being approximately 688 thousand cubic feet ⁷⁵ of natural gas. During 2025, the Company added 550,400 BOE ⁷⁶ of proved undeveloped reserves in its Jameson field as a result of new drilling plans in that field. The company's plan of business involves acquiring interests in oil and natural gas reserves and sponsoring private working interest participations, and it believes that its stockholders are better served by diversification of its investments among individual drilling prospects. Through its private placement sale of working interest in certain oil and gas properties, Royale can acquire interests and develop oil and natural gas properties with greater diversification of risk and still receive an interest in the revenues and reserves produced from these properties.

Another growth vector is the continued development of the Pradera Fuego project in Texas. On September 3, 2025, the Company, through its wholly-owned subsidiary Royale Energy Funds, Inc, acquired certain non-operated working and net revenue interests in seven gross (0.189 net) producing horizontal wells and approximately 382.9 net acres of associated leasehold acreage within the Pradera Fuego project from Pradera Fuego, LP effective July 1, 2025, for total consideration of $1.5 million ⁷⁷ in cash. Prior to the Pradera Fuego Acquisition, Royale held working and revenue interests in certain wells within the Pradera Fuego project, and therefore, the acquisition increased the Company’s aggregate working and revenue interests in the project. The company also has plans to increase oil and gas revenue participation in the drilling and completion of non-operated wells in the Permian Basin in Texas. During 2025, the Company added 550,400 BOE ⁷⁸ of proved undeveloped reserves in its Jameson field as a result of new drilling plans in that field, and in its other non-operated Texas properties, one gross (0.35 net) well was drilled during 2025, converting 22,400 BOE ⁷⁹ of proved undeveloped reserves into proved developed reserves, and two newly planned undeveloped wells were added to the Company’s estimates, bringing the total number of proved undeveloped well locations in those properties to six.The filing does not contain specific operational outlook details regarding supply chain posture, manufacturing capacity, technology infrastructure investments, or headcount strategy beyond the current headcount of 11 full-time employees.

The filing does not contain specific quantitative capital allocation plans for future periods, such as R&D spending levels, capital expenditure plans, share repurchase authorization amounts, or dividend policy beyond the statement that the board of directors did not declare cash dividends in either 2025 or 2024.

A significant headwind explicitly flagged by management is the company's substantial working capital deficit and the substantial doubt about its ability to continue as a going concern. At December 31, 2025, Royale had a working capital deficit of $11,550,839 ⁸⁰ and an accumulated deficit of $94,566,369 ⁸¹, with recurring net losses from operations. Management stated that there is doubt that the Company has the ability to meet liquidity demands through cash-flow from operations, and the Company expects to seek alternative capital sources through additional sales of equity or debt securities, or the sale of property, which may not be available at all, or on terms deemed reasonable. Another headwind is the inherent volatility in oil and natural gas prices, as the company's revenues are highly dependent on market conditions, with the most significant factors affecting results of operations being changes in oil and natural gas prices, production levels and reserves, turnkey drilling activities, and the increase in future cost associated with abandonment of wells. The company also faces the risk that its insurance coverage may not adequately cover all losses that may be sustained in connection with its business activities.Management's message to shareholders, as conveyed through the Management's Discussion and Analysis, emphasizes the company's focus on its principal lines of business as an independent oil and natural gas producer, with the most significant factors affecting results of operations being changes in oil and natural gas prices, production levels and reserves, turnkey drilling activities, and the increase in future cost associated with abandonment of wells.The strategic priorities emphasized by management include continuing to explore and develop oil and natural gas properties with concentration in Texas, increasing oil and gas revenue participation in the drilling and completion of non-operated wells in the Permian Basin in Texas, and implementing cost control measures that include the reduction of overhead costs and through the sale of non-strategic assets, and seeking additional debt and/or equity financing to address the company's working capital deficit and going concern issues.

The most material risk to Royale Energy is its significant working capital deficit and the substantial doubt about its ability to continue as a going concern, as the company had a working capital deficit of $11,550,839 ⁸² and an accumulated deficit of $94,566,369 ⁸³ at December 31, 2025, with recurring net losses from operations. Management stated there is doubt that the Company has the ability to meet liquidity demands through cash-flow from operations, and the Company expects to seek alternative capital sources through additional sales of equity or debt securities, or the sale of property, which may not be available at all, or on terms deemed reasonable. A second material risk is the company's dependence on commodity prices, as revenues from oil and gas production decreased $319,631 ⁸⁴ or 14.23% ⁸⁵ to $1,926,442 ⁸⁶ from 2024 revenues of $2,246,073 ⁸⁷, mainly due to lower oil commodity prices during 2025, and the net sales volume of oil and condensate decreased by approximately 593 barrels ⁸⁸ or 2.2% ⁸⁹. A third risk is the company's significant working capital deficit and its ability to continue as a going concern, as the company has suffered recurring losses from operations and has a working capital deficiency that raise substantial doubt about its ability to continue as a going concern. A fourth risk is the company's reliance on the availability of additional capital, as management expects to seek alternative capital sources through additional sales of equity or debt securities, or the sale of property, which may not be available at all, or on terms deemed reasonable.

Management's message, as conveyed through the Management's Discussion and Analysis, emphasizes the company's focus on its principal lines of business as an independent oil and natural gas producer, with the most significant factors affecting results of operations being changes in oil and natural gas prices, production levels and reserves, turnkey drilling activities, and the increase in future cost associated with abandonment of wells.The strategic priorities emphasized by management include continuing to explore and develop oil and natural gas properties with concentration in Texas, increasing oil and gas revenue participation in the drilling and completion of non-operated wells in the Permian Basin in Texas, and implementing cost control measures that include the reduction of overhead costs and through the sale of non-strategic assets, and seeking additional debt and/or equity financing to address the company's working capital deficit and going concern issues.