Royale Energy: Ready To Pop?

| About: Royale Energy, (ROYL)

Royale Energy (NASDAQ:ROYL) is a speculative micro-cap oil and natural gas producer that has a history of making explosive gains. This company first caught my eye in the summer of 2008 when its share price jumped from the two dollar range to over twelve dollars in just a couple of months. This was in the midst of the peak oil craze when other micro-cap oil companies like Pyramid Oil Company (NYSEMKT:PDO), Mexco Energy Corporation (NYSEMKT:MXC), and Fieldpoint Petroleum (NYSEMKT:FPP) also had multibagger gains. In 2011 the stock price went from around two dollars to over seven dollars in just a couple of weeks and in 2012 the stock price traded north of six dollars. The company recently announced a major development that has the potential to send the stock price racing up again.

In 2012 Royale Energy completed the acquisition of approximately 91,000 acres of prospective shale oil property in the north slope of Alaska. The company seemed to have trouble raising money to develop these properties but on April 10th of this year the company announced a letter of intent with an undisclosed company to receive $100 per acre in cash, plus other consideration including stock options and exploration cost sharing for a total of over $1,200 per acre for up to 50,875 acres of its 96,000 acre Alaska North Slope holdings.

The stock price popped from $2 to around $3.50 when this was announced but has surprisingly sold off and has found support in the $2.30 range. The stock price is starting to trend up again and I think the current price provides a good entry point for a speculation.

The main reason for the quick sell-off is the prospective agreement is still under negotiation between Royale Energy and the undisclosed company. The agreement "is expected to be completed on or before May 30 this year" but the price action of the stock seems to show skepticism of whether this deal will get finalized. I find it hard to believe that Royale Energy would announce this potential deal if there was not a good chance of it getting completed. If the deal does get consummated I expect another big jump in the stock price. Royale Energy will get much needed cash and it will allow the company to perform a seismic survey and drill two horizontal wells to prove its acreage.

The potential of fracking (horizontal drilling) in Alaska oil is still unknown but the U.S. Geological Survey (USGS) estimated there is a maximum potential of 2 Bbbl of oil and 80 Tcf of gas recoverable from shales on Alaska's North Slope. If Royale Energy or any other company drilling in this area can prove this potential the gains should be massive.

Trading Royale Energy is not without significant risk. The company reported a 62 percent decline in revenue in 2012 compared to 2011 and net loss almost tripled (If you exclude an income tax provision taken in Q4 net loss was only down 7%). The decline in revenue was due to less sales of oil and gas and a sharp decline in drilling revenues. However, the company recently announced some positive developments. In March Royale Energy announced a successful gas well in California and they stated in their Q4 results in April that they are "actively pursuing plans to drill 3 wells in California's Sacramento Basin in the coming month". If these wells prove successful it will be another positive catalyst to the stock price.

In spite of the deteriorating fundamentals in 2012, I believe a speculative trade in Royale Energy is worth the risk considering the potential reward. This stock has posted huge speculative gains in the past and if Royal Energy finalizes the Alaska North Slope agreement I expect another big gain.

Disclosure: I am long ROYL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.