Seeking Alpha
Profile| Send Message| ()  

On November 26, The Wall Street Transcript interviewed Stephen M. Hosmer, Executive Vice President and Chief Financial Officer of Royale Energy, Inc. (ROYL). Key excerpts follow:

TWST: Please begin with a brief historical sketch of the company and a picture of the things you are doing presently.

Mr. Hosmer: Royale Energy was formed over 20 years ago to develop, explore, and produce natural gas and oil throughout the domestic United States. We achieved that, first as a private family company and through growth and expansion we continue to maintain that primary focus now as a publicly traded company. We spread risk and diversify the development of our properties by inviting individual participants to share ownership in up to 50% of our drilling and acquisitions. While our focus has been largely in natural gas, we have blended oil into our mix in varying proportions over the years, anywhere from 5% to 30% of our overall reserve base. As a company, we focus and specialize in taking a lower risk sector of the exploration business, trying to achieve between a 50% to 80% success rate in the wells that we drill.

TWST: What might distinguish you within the competitive landscape?

Mr. Hosmer: There are a number of things that give us a competitive advantage over our peers. First and foremost is the relationship that I mentioned between our private investors who participate in up to 50% of every well that we drill. This strategy of shared ownership in multiple wells provides investment opportunities that minimize company risk, while seeking superior returns. Many exploration production companies focus on the exploration side; we focus on the production side. It's obvious that cash flow and the production is the end goal, but other companies tend to take the higher risk profile. They look for success in new discoveries, anywhere from one in 10 to maybe four in 10 wells drilled in an exploratory sense. Royale, on the other hand, takes a low risk approach to evaluating properties for natural gas and oil. It is low risk because we are predominantly drilling in areas that have known production. We want to produce gas from 50% to 80% of the wells that we drill. Some people will often ask why it isn't 100% of the wells, why we don't target a perfect success rate. Of course, in this case one would bring up the laws of risk and return. One must take risk in order to achieve a reasonable return. Often people don't realize that taking unnecessary risk doesn't enhance return. We found an optimal position on that risk-return curve focusing on a 50% to 80% success ratio in the wells that we drill.

TWST: Would you give us your own reading of the industry outlook and about the outlook for your own company?

Mr. Hosmer: I feel we, as a company, have been a bit of the front runner or the canary in the coal mine if you will. Because we invite private investors to participate in up to half of our drilling interest, it allows the company to diversify and drill a greater number of wells relative to our size. Because of this strategy, we were able to produce more even during those downturn periods of the industry cycle we witnessed in the late 1980s, and then again in the late 1990s. As such, when the industry started to turn around and we started to see product prices rise, Royale was on the very front end of the positive ground that we gained in that turnaround. As other companies started to recognize their profits and see cash flow generate drilling capital for them, it put a lot of pressure on Royale to reduce our margins. As a result, those reduced margins have caused us to have a more difficult time over the last 18 to 20 months. I feel that the rest of the industry is following suit, and the public is just now becoming aware because the same scenario is affecting several of the larger companies. For example, BP's earnings came out two weeks ago quite a bit softer than expected. I project that our industry is going to recognize a bit of a pullback as a result of lower margins. Royale has been experiencing this for some 18 to 20 months now. We have started the process of realigning to meet the current industry dynamic. I believe that Royale Energy is now poised to start the turnaround process, while the rest of the industry is starting to become aware of their thinner margin.

TWST: What is your feeling about your current stock price?

Mr. Hosmer: Any executive who is satisfied with their current stock price is probably content at not growing. We have seen our stock price fall sharply from its high when the industry started to turn around, and we started to see product prices rise in the winter of 2000-2001 when we were, as I mentioned, at the front edge of that price movement. I think the market has fairly understood that our margins trimmed down quite significantly. What I hope the market will recognize is that our position in that front runner slot is going to allow us to take off and fully develop cash flow out of our Utah properties and lead the way into the next cycle.

Source: Royale Energy CFO Speaks About His Company