Royale Energy: Anatomy of a Market Hit Job

If you are looking for a textbook example of illegal trading and the systematic destruction of a company's stock price, look no further than Royale Energy (ROYL).

Royale Energy's management successfully navigated this company through difficult times. In the first quarter of 2008, they increased cash flow more than 50%. They then promised and delivered profit in Q2. In fact they exceeded expectations. The company was then listed on the Russell 2000 and received favorable articles from a variety of sources (i.e. Fortune and Motley Fool).

Since then, market movers have systematically engaged in automated, electronic, illegal trading and did something I didn't think they would be able to pull off. They recently drove the price down on 7 consecutive days, which culminated in yesterday's closing price of $3.89 (down 16% for the day), when UNG (natural gas index fund) was down less than .5 % on absolutely no notable news.

This goes well beyond drops in the energy sector, and this company has repeatedly been listed on the naked short list. I strongly recommend investors stay away from any small cap stocks. ROYL is a solid company and will eventually rebound. Two weeks ago, this stock traded at $7.17. From there, it plunged to $3.89 on a series of naked short sales. If this isn't illegal trading, what is?

Disclosure: Long

Comments

[SA Editor J...:]

You seem concerned about the recent action but it looks like it's still up a bunch for long-term holders.

2008 Sep 16 04:07 PM

[User 234834:]

Your comment completely confuses me. As of yesterday, it was the lowest since May 15th. It's consistent been above this price since 2000. Could you define long-term. 16 million shares of this stock exchanged hands since June of this year - more than the total of the previous 5 years combined.

One more question, my article has nothing to do whether it is up or down. It's about illegal trading and the fact this stock was driven down illegally. Today, it was manipulated up - it works both ways. I am concerned that our market is corrupt, and this is simply not a debateable issue - it is a fact. If you trade small caps, you better trade with the MMs and understand them.

2008 Sep 16 04:42 PM

[Wizard1:]

Bah, this company lost over 50% of it's value (from 5s to near 2) over the past couple years while energy was booming. They LOST money those two years. Yes, they finally turned a profit last quarter, considering NG was near $13 and oil in the $140s I certainly hope so, if not when would they? The price was driven up on speculation about the 15,000 acres they own near some other property which proved to be valuable but ROYL has not done much with it yet, last I heard they had "applied for a permit to drill". They did sell off some shares in the 7s which was good since it raised some capital. But I think this company was horrible before, losing nearly 60% of it's value and losing money in a booming energy market over two years so it's not like the speculation on the 15,000 acres is just a "bonus", without it not a lot to fall back on.. That's just my opinion of course though the losses and drop from 5 to 2 did happen. I do agree stocks are manipulated nowadays, can't just buy and hold anymore. And small caps very dangerous as they can be manipulated more easily. Stock market has become a gamble for anyone but a professional investor/trader I think. But where else can you put your money, CDs paying 3.xx% and banks falling left and right, real estate in free fall, commodities manipulated as much as stocks................... Short selling should not be allowed period IMO, investing in the market is investing in America (well US stocks at least), short selling is betting AGAINST America. If you don't like a stock sell it or don't buy it, plenty of others to choose from, shorting should not be an option period. IMO.

2008 Sep 16 05:44 PM

[Leadman:]

Michael, you make the accusation that this company is a victim of naked short sales but provide no evidence. Whilst I also know short selling is very abused, it also seems to be the favorite crutch where penny stock investors place blame when things do not go their way. Maybe you should look elsewhere? When I look at the fundamentals of this company, it still looks grossly overvalued when compared to peer companies. A quick look at the SEC filings and I see that this company has weak earnings, weak cash flow and a paltry NAV. At $3.89, I say this looks like it should drop more.

2008 Sep 16 07:08 PM

[bobby_h:]

He's lost money on this, and now wants to blame someone.
If there is naked shorting, well.. people don't short the heck out of stocks for no reason, so maybe you should look at what they are saying. Ultimately if this company is good like you say, you should take advantage of the shorts, and buy more now at this low price.
Looks to me though like this stock went up too much, and now with the decline in oil prices, it just had to come back to earth. Briefly looking at the company's accounts, I don't see why it deserved to run up to 14 in the first place.

2008 Sep 16 08:19 PM

[john s. gordon:]

eliminate naked shorts by law.
> jack

2008 Sep 17 08:33 AM

[User 234834:]

I have made it clear that naked short selling is happening on all small cap stocks. I watched the trading on LVL 2 and can clearly see the naked shorts. Also ROYL has been on the naked short list provided to traders. The Q1 cash flow increase was based on gas under $10. Much of Q2 was well below the stated figures above.

There is no doubt that the falling NG will have an adverse impact on ROYL's Q3 results; however, it should still be profitable. I also made it clear that ROYL is a speculative play.

This stock is no different that any other small cap. There is simply no arguing that ROYL has been a target of naked short selling. You want proof - look at all of the trading between 10:39 and 10:51 - 4 consecutive naked shorts in a row.

Yes, I am losing money but my average PPS is under $6. I am betting that a couple weeks from now anybody in ROYL at this price will outperform the market - which was down 450 today.

2008 Sep 17 04:35 PM

[User 234834:]

I do agree with the one comment - this stock should never have reached $14. That is too much for this stock. It's like everything else. I can assure you this stock will be over $5 very soon. I also agree on the lackluster performance of the company over the previous few years.

Further I agree that ROYL will be negatively impacted by the drop in Q3; however, their production volume has gone up and they will still show a profit (albeit lower). One other thing, ROYL is unhedged and NG went up 50 cents today. NG is going up - LOOK at UNG (which I also own) that is up 8% today.

ROYL also put into production a well producing 1 million cubic feet a day and will produce 2 million with a larger pipe. If my math is correct, that is $3 million in revenue a year. Do more DD and you will see that ROYL is getting ready to drill a well in Utah that has huge potential.

2008 Sep 17 04:41 PM

[User 234834:]

These posts remind me of how short term we Americans are. Take a look at ROYL over the past 10 or 20 years and take a look at their share price. They went through hard times and they are coming back. I am LONG in the stock - no doubt.

Just so everybody is clear. I have been buying and selling this stock along with the MMs. I don't like the MM manipulation, but you have to trade with them.

2008 Sep 17 04:52 PM

[Leadman:]

Michael, I don't disagree that naked shorting has possibly affected ROYL. But you need to look past that. Shorts thrive on companies with weak fundamentals. My point is that there is a bigger problem here. Look at the EBITDA, the (lack of) earnings, and the reserves. What do you think a reasonable market value of this company should actually be?

2008 Sep 17 04:57 PM

[User 234834:]

I agree shorts thrive on weak market fundamentals. The fundamentals have changed. That's why the number of shares short on ROYL have dropped by more than 50% the last month - a drop from the previous month.

Shorts selling is a legimate way to trade a stock. Without short selling there would be no market. So, short positions are down. Naked short selling is a tool used to drive a company's PPS down. By the way, the MMs artificially raised the price yesterday.

I am a corporate finance guy and understand your question. Company valuation is a very difficult process. The market will eventually get it right. Royl has been at the top of Buy-ins.net list. I think you would agree this list is made for professional traders.

I am a big boy, and don't have any problem if the market determines $4.25 is a fair price. Much of the value of this stock has to do with reserves. The fact is that ROYL has increased production significantly., which will indeed be offset by a drop in NG prices.

Do some research on ROYL's 15,000 acres in the Unita basin in Utah. The land next door sold for 30K per acre. Stewart petroleum just hit a major NG find 1500 feet from ROYL's property line. Let's just say that ROYL has begun drilling. You can do the math.

If ROYL gets 1/10th of the expected gas, the compay's valuation will be 10 times its current market cap. I am not making this up. I am also not worried. Check out the 1 million a day of NG. Also, ROYL is getting gas that costs $2 per cubic thousand to drill. They will make money at $5.

My guess is that ROYL will be heading up well past $5. I'm in at under $6, so I am not worried. Take some time and do some DD on ROYL and get back to me. I have over 300 hours of research on this company. I would dump it today if I thought it was a $5 stock.

Please check all of my claims. The value of ROYL simply depends on the success of hitting the well in Utah. If it doesn't, ROYL is probably a $4 stock. If it does, $14 may not be that far off. BTW, they are also a takeover target by two large petroleum companies

2008 Sep 17 05:25 PM

[sbrenize:]

biz.yahoo.com/e/080612...
I pasted this link the last time you went off about this stock. I suggest you read it. If you don't understand how injecting 4 million dollars of new cash into a less than 40 million dollar company will eventually cause the stock to readjust you have no business investing in Micro-caps. Common sense dictates that those of us that sat and watched this stock sit at 3-4 dollars a share for over a year would cash in at 13-14. Also I would suggest that you read the quarterly reports, these show that despite what the market did this company is a true 4-5 share stock. That said when this stock gets below 3 again I will buy and then I will wait until the speculators take some deal that the Hosmers make to bring in Haliburton on a project as a sign to buy. Then I will wait until it hits 10-15 and dump. This will happen again next year, I hope you've learned your lesson. There are 2 ways to make money on a 'building' micro-cap. 1. Buy cheap and dump at 2-3 times paid price or 2. Buy cheap and hold for 20 years or until it gets bought out.

2008 Sep 19 02:24 PM

[User 234834:]

In retrospect, I wish I would have sold at $14.71. I was simply away from the office when it spiked and didn't. I stand behind my original posts, but am smart enough to know when things change. If NG and Oil would have continued as projected, ROYL would have done well.

I do take exception to ROYL's accounting practices beginning with the inclusion of the sale of their RIO field as operating income. After my initial miss of on the above price, I traded down my position aggressively over 6 months and got my average cost down to $2.95. I sold my last shares at $2.51 and have not held a share since December of 2008.

You must admit that the world has changed. I gave credit to ROYL's management when they turned the corner. However, Don Hosmer's PR announcement today on ROYL's earnings is misleading and the market will figure this out on Monday. Royale management must be called out for misleading stockholders in early December annoucing a go live of their long awaited well in early December. They missed the target 10 days later and didn't say another word until today. Please note that this communication was there first operational update. This time it has nothing to do with MMs. Royale's PPS will be driven down by the market fair and square.

I could not disagree more with the ethics of naked short selling. I was smart enough to trade my position down, but it was done long before the market crashed. MMs have destroyed our market and naked short selling must be made illegal. I have made substantial amounts of money by playing their game, but the game is being played.

You should not be able to sell shares that don't exist. If you thing the finanical meltdown was bad, wait until the market goes up for good and the investment firms have sold twice as many shares as exist. One final note - the SEC is worthless.

I was glad to see two individuals at KPMG are going to get 22 year sentences.

Mar 27 10:46 PM