{"url_path":"/sec/royl/10-k/2026/item-1","section_key":"item-1","section_title":"Item 1 Description of Business**","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-07-13","source_url":"https://www.sec.gov/Archives/edgar/data/1694617/0001185185-26-002897-index.html","accession_number":"0001185185-26-002897","cik":"0001694617","ticker":"ROYL","issuer_name":"Royale Energy, Inc.","edgar_url":"https://www.sec.gov/Archives/edgar/data/1694617/0001185185-26-002897-index.html","primary_entity_key":"0001694617","primary_entity_name":"Royale Energy, Inc."},"word_count":2343,"has_tables":true,"body_markdown":"**Item 1 Description of Business**\n\n \n\nRoyale Energy, Inc. (“Royale” or the “Company”)\nis an independent oil and natural gas producer incorporated under the laws of Delaware. Royale’s principal lines of business are\nthe production and sale of oil and natural gas, acquisition of oil and gas lease interests and proved reserves, drilling of both exploratory\nand development wells, and sales of fractional working interests in wells to be drilled by Royale. Royale was incorporated in Delaware\nin 2017 and is the successor by merger (as described below) to Royale Energy Funds, Inc., a California corporation formed in 1983. On\nDecember 31, 2025, Royale and its consolidated subsidiaries had 11 full-time employees.\n\n \n\n**Recent Activity**\n\n \n\nOn September 3, 2025, the Company, through its wholly-owned subsidiary\nRoyale Energy Funds, Inc, acquired certain non-operated working and net revenue interests in seven gross ( .189 net) producing horizontal\nwells and approximately 382.9 net acres of associated leasehold acreage within the Pradera Fuego project (the “Pradera Fuego Acquisition”\nor the “Pradera Fuego Acquisition Properties”) from Pradera Fuego, LP (the “Seller”) effective July 1, 2025, for\ntotal consideration of $1.5 million in cash. Prior to the Pradera Fuego Acquisition, Royale held working and revenue interests in certain\nwells within the Pradera Fuego project, and therefore, the acquisition increased the Company’s aggregate working and revenue interests\nin the project. The acquisition was financed through a combination of $1.0 million of cash on hand and an increase in its existing borrowings\nof additional $500,000.\n\n \n\n**Royale Business**\n\n \n\nRoyale and its subsidiaries own wells, leases, and proved and non-proved\nreserves of oil and natural gas located mainly in Mitchell County and Ector County, Texas and in the Sacramento Basin and San Joaquin\nBasin in California, as well as in, Oklahoma. Royale also owns an overriding royalty interest in a non-producing well in Alaska. Royale\nusually sells a portion of the working interest in each well it drills or participates with third-party participants and retains a portion\nof the prospect for its own account. Selling part of the working interest to others allows Royale to reduce its drilling risk by owning\na diversified inventory of properties with less of its own funds invested in each drilling prospect, than if Royale owned all the working\ninterest and paid all drilling and development costs of each prospect itself. Royale generally sells working interests in its prospects\nto accredited investors (as defined in Regulation D of the SEC) in securities offerings exempt from registration with federal and state\nsecurities regulators. The prospects are typically bundled into multi-well investments, which permit the third-party investors to diversify\ntheir investments by investing in several wells instead of investing in single well prospects.\n\n \n\nDuring its fiscal year ended December 31, 2025, Royale continued to\nexplore and develop oil and natural gas properties with concentration in Texas. In 2025, Royale participated in the drilling of one gross\n(0.0035 net) wells, which was commercially productive. Royale’s estimated total proved reserves were approximately 949,727 and 304,200\nBOE (barrels of oil equivalent) or 5.7 and 1.8 BCFE (billion cubic feet equivalent) at December 31, 2025 and 2024, respectively. According\nto the reserve reports prepared by Netherland, Sewell & Associates, Inc., Royale’s independent petroleum engineers, the net\nreserve value of its proved developed and undeveloped reserves was approximately $20.5 million at December 31, 2025, based on the average\nWest 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\nas applied on a field-by-field basis. Netherland, Sewell & Associates, Inc. supplied reserve value estimates for all of the Company’s\nCalifornia, Texas, and Oklahoma properties.\n\n \n\nProved reserves are those quantities of oil and natural gas, which,\nby analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given\ndate forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior\nto the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain.\n\n \n\nProved developed reserves are estimated quantities of oil, natural\ngas and natural gas liquids (“NGL”) that geological and engineering data demonstrate with reasonable certainty to be commercially\nrecoverable in future years from known reservoirs under existing economic and operating conditions.\n\n \n\nProved developed producing reserves are reserves that can be expected\nto be recovered from existing wells and completions with existing equipment and operating methods.\n\n \n\nProved developed nonproducing reserves are hydrocarbons in a potentially\nproducing horizon penetrated by a wellbore, the production of which has been postponed pending completion activities and the installation\nof surface equipment or gathering facilities or pending the production of hydrocarbons from another formation penetrated by the wellbore.\nThe hydrocarbons are classified as proved developed but nonproducing reserves.\n\n \n\n1\n\n[Table of Contents](#toc) \n\n \n\nNet reserve value does not represent the fair market value of our reserves\non that date, and we cannot be sure what return we will eventually receive on its reserves. Net reserve value of proved developed and\nundeveloped reserves was calculated by subtracting estimated future development costs, future production costs and other operating expenses\nfrom estimated net future cash flows from our developed and undeveloped reserves.\n\n \n\nRoyale’s standardized measure of discounted future net cash flows\nor “PV-10” a non-GAAP measure, at December 31, 2025, of its reserves was estimated to be $11,176,100. This figure was calculated\nby subtracting Royale’s estimated future income tax expense from the net reserve value of proved developed and undeveloped reserves,\nand by further applying a 10% annual discount for estimated timing of cash flows. PV-10 is the present value of estimated future revenues,\ndiscounted at 10% annually, to be generated from the production of proved reserves determined in accordance with the SEC guidelines, net\nof estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without\ngiving effect to (i) non-property related expenses such as general and administrative expenses, debt service, and future income tax expense,\nand (ii) depreciation, depletion and amortization. A calculation of Royale’s standardized measure of discounted future net cash\nflow is contained in Note 18 to its Financial Statements, Supplemental Information about Oil and Gas Producing Activities (Unaudited)\n\n \n\nRoyale reported a gain on turnkey drilling in connection with the drilling\nof wells on a “turnkey contract” basis in the amount of $1,322,149 for the year ended December 31, 2025. For the year ended\nDecember 31, 2024, Royale reported a gain on turnkey drilling in the amount of $1,607,677. We cannot assure that gains of this type will\noccur in 2026 or if they do, they will be of similar magnitude.\n\n \n\nIn addition to Royale’s own staff, Royale hires independent contractors\nto drill, test, complete and equip the wells that it drills. Approximately 99% of Royale’s total revenue for the year ended December\n31, 2025, came from sales of oil and natural gas from production of its wells in the amount of $1,926,442. In 2024, this amount was $2,246,073,\nwhich represented 99% of Royale’s total revenues for the respective periods presented. See Note 2 to our Financial Statements.\n\n \n\n**Plan of Business**\n\n \n\nRoyale acquires interests in oil and natural gas reserves and sponsors\nprivate working interest participations. Royale believes that its stockholders are better served by diversification of its investments\namong individual drilling prospects. Through its private placement sale of working interest in certain oil and gas properties, Royale\ncan acquire interests and develop oil and natural gas properties with greater diversification of risk and still receive an interest in\nthe revenues and reserves produced from these properties. By selling some of its working interest in most projects, Royale decreases the\namount of its investment required in the projects and diversifies its oil and gas property holdings, to reduce the risk of concentrating\na large amount of its capital in a few projects that may not be successful.\n\n \n\nAfter acquiring the leases or lease participation, Royale drills or\nparticipates in the drilling of development and exploratory oil and natural gas wells on a property. Royale pays its proportionate share\nof the actual cost of drilling, testing, and completing the wells to the extent that it retains all or any portion of the working interest.\n\n \n\nRoyale also sells fractional working interests in undeveloped wells\nto finance part of the drilling cost. A drilling contract that calls for a company to drill a well, for a fixed price, to a specified\ndepth or geological formation is called a “turnkey contract.” When Royale sells fractional working interests in undeveloped\nproperty to raise capital to drill oil and natural gas wells, generally it agrees to drill these wells on a turnkey contract basis, so\nthat the holders of the fractional interests prepay a fixed amount for the drilling and completion of a specified number of wells. Under\na turnkey contract, Royale may record a gain if total funds received to drill a well were more than the actual cost to drill those wells\nincluding costs incurred on behalf of the participants and costs incurred for its own account.\n\n \n\nAlthough Royale does not usually address whether investors have a right\nto participate in subsequent wells in the same area of interest as a proposed well, it is the Company’s policy to typically offer\nto investors in a successful well the right to participate in subsequent wells at the same percentage level as their working interest\ninvestment in the prior successful well.\n\n \n\nOur policy for turnkey drilling agreements is to recognize a gain on\nturnkey drilling programs after our obligations have been fulfilled, and a gain is only recorded when funds received from participants\nare in excess of all costs we incur during the drilling programs (e.g., lease acquisition, exploration and development costs), including\ncosts incurred on behalf of participants and costs incurred for its own account. See Note 1 to our Financial Statements, at page F-9.\n\n \n\nOnce commenced, drilling is generally completed within 10-30 days.\nRoyale maintains internal records of the expenditure of each investor’s funds for drilling projects.\n\n \n\nRoyale generally operates the wells it completes. As operator, we receive\nfees set in line with industry standards from the owners of fractional interests in the wells as well as expense reimbursements. For the\nyear ended December 31, 2025, Royale charged overhead from the operation of the wells in the amount of $441,965, which were an offset\nto general and administrative expenses. In 2024, such amount was $430,680. At December 31, 2025, Royale operated wells in California and\nTexas. Royale also has non-operating interests in wells in California, Texas, and Oklahoma.\n\n \n\n2\n\n[Table of Contents](#toc) \n\n \n\nRoyale currently sells most of its California natural gas production\nthrough Pacific Gas & Electric (“PG&E”) pipelines to independent customers on a monthly contract basis, while some\ngas is delivered through privately owned pipelines to independent customers. Since many users are willing to make such purchase arrangements,\nwe believe the loss of any one customer would not affect our overall sales operations.\n\n \n\nOil production from the operated Jameson property, in Texas, is sold\nto Energy Transfer Crude Marketing LLC, less transportation on a renewable evergreen contract based on West Texas Intermediate spot prices.\nThe natural gas is sold pursuant to a long term contract with WTG Jameson, L.P., based on Henry Hub, spot gas prices. Production from\nthe non-operated Pradera Fuego field is sold pursuant to contracts engaged by the operator, and is generally based on posted “spot”\nprices for the respective products.\n\n \n\nAll oil and natural gas properties are depleting assets in which production\nnaturally decreases over time as the finite amount of existing reserves are produced and sold. It is Royale’s business as an oil\nand natural gas exploration and production company to continually search for new development properties. The Company’s success will\nultimately depend on its ability to continue locating and developing new oil and natural gas resources. Oil demand is subject to global\ndemand and prices can fluctuate widely. The future market is likely to be subject to continued price dynamics. Natural gas demand and\nthe prices paid for gas are seasonal. In recent years, natural gas demand and prices in Northern California have fluctuated unpredictably\nthroughout the year.\n\n \n\n**Competition, Markets and Regulation**\n\n \n\nCompetition\n\n \n\nThe exploration and production of oil and natural gas is an intensely\ncompetitive industry. The sale of interests in oil and gas projects, like those Royale sells, is also very competitive. Royale encounters\ncompetition from other oil and natural gas producers, as well as from other entities that invest in oil and gas for their own account\nor for others, and many of these companies are substantially larger than Royale.\n\n \n\nMarkets\n\n \n\nMarket factors affect the quantities of oil and natural gas production\nand the price Royale can obtain for the production from its oil and natural gas properties. Such factors include: the extent of domestic\nproduction; the level of imports of foreign oil and natural gas; the general level of market demand on a regional, national and worldwide\nbasis; domestic and foreign economic conditions that determine levels of industrial production; political events in foreign oil-producing\nregions; and variations in governmental regulations including environmental, energy conservation, and tax laws or the imposition of new\nregulatory requirements upon the oil and natural gas industry.\n\n \n\nRegulation\n\n \n\nFederal and state laws and regulations affect, to some degree, the\nproduction, transportation, and sale of oil and natural gas from Royale’s operations. States in which Royale operates have statutory\nprovisions regulating the production and sale of oil and natural gas, including provisions regarding deliverability. These statutes, along\nwith the regulations interpreting them, generally are intended to prevent waste of oil and natural gas and to protect correlative rights\nto produce oil and natural gas by assigning allowable rates of production to each well or proration unit.\n\n \n\n**Availability of Public Filings**\n\n \n\nYou may obtain a copy of any materials filed by Royale with the Securities\nand Exchange Commission (“SEC”) at http://www.sec.gov. Royale also provides access to its SEC reports and other public announcements\non its website, http://www.royl.com. The information on our website is not part of this Annual Report on Form 10-K."}