_______________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For Quarter Ended July 31, 2004
Commission File Number 0-8877
CREDO PETROLEUM CORPORATION
Colorado 84-0772991
(State of Incorporation) (IRS Employer Identification)
1801 Broadway, Suite 900 80202
Denver, Colorado (Zip Code)
(Address of principal executive office)
303-297-2200
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, net of treasury stock, as of
August 31, 2004: Common stock, $.10 par value - 6,037,599
Preferred stock, no par value - None issued
_______________________________________________________________
CREDO PETROLEUM CORPORATION
Form 10-QSB For Quarter Ended July 31, 2004
TABLE OF CONTENTS
_______________________________________________________________
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
As of July 31, 2004 (Unaudited) and October 31, 2003
Consolidated Statements of Earnings and Changes in
Retained Earnings (Unaudited)
For the Nine and Three Month Periods Ended
July 31, 2004 and 2003
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Month Periods Ended July 31, 2004 and 2003
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Controls and Procedures
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
____________________________________________
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CREDO PETROLEUM CORPORATION
Consolidated Balance Sheets
A S S E T S
July 31, October 31,
2004 2003
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,299,000 $ 1,885,000
Short term investments 6,118,000 4,778,000
Receivables:
Trade 749,000 410,000
Accrued oil and gas sales 1,575,000 1,256,000
Other 10,000 234,000
------------ ------------
Total current assets 9,751,000 8,563,000
------------ ------------
OIL AND GAS PROPERTIES, net, at cost, using full cost method:
Unevaluated 3,151,000 2,075,000
Evaluated 13,787,000 11,986,000
------------ ------------
Net oil and gas properties 16,938,000 14,061,000
------------ ------------
EXCLUSIVE LICENSE AGREEMENT, net of
amortization of $274,000 in 2004
and $221,000 in 2003 425,000 478,000
OTHER, net 831,000 470,000
------------ ------------
$ 27,945,000 $ 23,572,000
============ ============
L I A B I L I T I E S A N D S T O C K H O L D E R S '
E Q U I T Y
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 2,609,000 $ 1,776,000
Income taxes payable 200,000 210,000
------------ ------------
Total current liabilities 2,809,000 1,986,000
------------ ------------
DEFERRED INCOME TAXES, net 4,289,000 3,358,000
EXCLUSIVE LICENSE OBLIGATION, less current
obligations of $53,000 355,000 355,000
ASSET RETIREMENT OBLIGATION 292,000 238,000
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, without par value,
5,000,000 shares authorized, none issued - -
Common stock, $.10 par value,
20,000,000 shares authorized,
6,340,000 shares issued in 2004 and 2003 634,000 634,000
Capital in excess of par value 12,463,000 12,463,000
Retained earnings, net of $6,277,000
related to 20% stock dividend in 2003 7,819,000 5,062,000
Other comprehensive income (loss) (264,000) 180,000
Treasury stock, at cost, 303,000 shares
in 2004 and 378,000 shares in 2003 (452,000) (704,000)
------------ ------------
Total stockholders' equity 20,200,000 17,635,000
------------ ------------
$ 27,945,000 $ 23,572,000
============ ============
See accompanying notes.
CREDO PETROLEUM CORPORATION
Consolidated Statements of Earnings And Changes in
Retained Earnings - Unaudited
Nine Months Nine Months Quarter Quarter
Ended Ended Ended Ended
July 31, July 31, July 31, July 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
REVENUES:
Oil and gas sales $6,932,000 $5,014,000 $2,226,000 $1,980,000
Operating 444,000 386,000 152,000 135,000
Investment income and other 186,000 318,000 61,000 128,000
---------- ---------- ---------- ----------
7,562,000 5,718,000 2,439,000 2,243,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Oil and gas production 1,464,000 1,159,000 532,000 467,000
Depreciation, depletion
And amortization 1,227,000 930,000 436,000 325,000
General and administrative 1,011,000 939,000 344,000 333,000
Interest 30,000 34,000 7,000 11,000
---------- ---------- ---------- ----------
3,732,000 3,062,000 1,319,000 1,136,000
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES AND
ACCOUNTING CHANGE 3,830,000 2,656,000 1,120,000 1,107,000
INCOME TAXES (1,073,000) (744,000) (314,000) (310,000)
---------- ---------- ---------- ----------
INCOME BEFORE ACCOUNTING
CHANGE 2,757,000 1,912,000 806,000 797,000
CUMULATIVE EFFECT ON PRIOR
YEARS OF SFAS 143-ACCOUNTING
FOR ASSET RETIREMENT
OBLIGATIONS (NET OF
TAXES OF $28,000) - 72,000 - -
---------- ---------- ---------- ----------
NET INCOME 2,757,000 1,984,000 806,000 797,000
RETAINED EARNINGS,
BEGINNING OF PERIOD 5,062,000 8,209,000 7,013,000 3,119,000
20% STOCK DIVIDEND - (6,277,000) - -
---------- ---------- ---------- ----------
RETAINED EARNINGS,
END OF PERIOD $7,819,000 $3,916,000 $7,819,000 $3,916,000
========== ========== ========== ==========
BASIC INCOME PER SHARE
BEFORE ACCOUNTING CHANGE $ .46 $ .32 $ .14 $ .13
CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING
PRINCIPLE - .01 - -
------ ------ ------ ------
BASIC INCOME PER SHARE $ .46 $ .33 $ .14 $ .13
====== ====== ====== ======
DILUTED INCOME PER SHARE
BEFORE ACCOUNTING CHANGE $ .45 $ .32 $ .13 $ .13
CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE - .01 - -
------ ------ ------ -----
DILUTED INCOME PER SHARE $ .45 $ .33 $ .13 $ .13
====== ====== ====== ======
See accompanying notes.
CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Nine Months Ended
July 31,
------------------------
2004 2003
----------- -----------
OPERATING ACTIVITIES:
Net income $ 2,757,000 $1,984,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 1,227,000 930,000
Deferred income taxes 931,000 675,000
Cumulative effect of change in
accounting principle - (72,000)
Changes in operating assets and liabilities:
Proceeds from short term investments 509,000 2,353,000
Purchase of short term investments (1,849,000) (1,760,000)
Trade receivables (339,000) (299,000)
Accrued oil and gas sales (319,000) (262,000)
Other (59,000) 199,000
Accounts payable and accrued costs
and expenses 682,000 435,000
Income tax payable (10,000) 84,000
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,530,000 4,267,000
----------- -----------
INVESTING ACTIVITIES:
Additions to oil and gas properties (3,980,000) (3,296,000)
Changes in other long-term assets (388,000) (4,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,368,000) (3,300,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options
(77,970 options in 2004) 291,000 26,000
Purchase of treasury stock
(2,000 shares in 2004 and 100 shares in 2003) (39,000) (1,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 252,000 25,000
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (586,000) 992,000
CASH AND CASH EQUIVALENTS:
Beginning of Period 1,885,000 1,324,000
----------- -----------
End of Period $ 1,299,000 $ 2,316,000
=========== ===========
Supplemental Cash Flow Information:
Cash paid for income taxes $ 157,000 $ (16,000)
=========== ===========
See accompanying notes.
CREDO PETROLEUM CORPORATION
Notes To Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements
have been prepared in accordance with U. S. generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by U. S. generally accepted accounting principles for complete
financial statements. In the opinion of management, the consolidated
financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of
the company's results for the periods presented. These consolidated
financial statements should be read in conjunction with the company's
Form 10-KSB for the fiscal year ended October 31, 2003.
CHANGE IN ACCOUNTING PRINCIPLE
In June 2001, the Financial Accounting Standards Board issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" that
requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred
and a corresponding increase in the carrying amount of the related
long-lived asset. The company adopted SFAS No. 143 on November 1, 2002
and recorded an asset and related liability of $179,000 (using a
5% discount rate) and a cumulative effect on change in accounting
principle on prior years of $72,000 (net of taxes of $28,000).
For the nine month periods ended July 31, 2004 and 2003, the company
recognized $10,000 and $7,000, respectively, of accretion expense
on the liability.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting for Oil and Gas Property Costs. As more fully
discussed in Note 1 to the consolidated financial statements
included with the company's Form 10-KSB for the fiscal year ended
October 31, 2003, the company (i) follows the full cost method of
accounting for the costs of its oil and gas properties,
(ii) amortizes such costs using the units of production method, and
(iii) applies a quarterly full cost ceiling test. Adverse changes in
conditions (primarily gas price declines) could result in permanent
write-downs in the carrying value of oil and gas properties as well
as non-cash charges to operations, but would not affect cash flows.
Estimates of Proved Oil and Gas Reserves. An independent
petroleum engineer annually estimates approximately 60% of the
company's proved reserves. The company estimates the remainder.
Reserve engineering is a subjective process that is dependent upon
the quality of available data and the interpretation thereof. In
addition, subsequent physical and economic factors such as the
results of drilling, testing, production and product prices may
justify revision of such estimates. Therefore, actual quantities,
production timing, and the value of reserves may differ substantially
from estimates. A reduction in proved reserves would result in an
increase in depreciation, depletion and amortization ("DD&A") expense.
A large reduction in proved reserve quantities or values could result
in a permanent write-down in the carrying value of oil and gas properties
as discussed in Accounting for Oil and Gas Property Costs above.
Estimates of Asset Retirement Obligations. In accordance with
SFAS No 143, the company makes estimates of future costs and the
timing thereof in connection with recording its future obligations
to plug and abandon wells. Estimated abandonment dates will be
revised in the future based on changes to related economic lives,
which vary with product prices and production costs. Estimated
plugging costs may also be adjusted to reflect changing industry
experience. Increases in operating costs and decreases in product
prices would increase the estimated amount of the obligation and
increase DD&A expense. Cash flows would not be affected until costs
to plug and abandon were actually incurred.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board
issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of SFAS No. 123." Among
other provisions, the statement amends the disclosure requirements
of SFAS No. 123, "Accounting for Stock-Based Compensation." Under
current accounting rules the company elected to account for its
stock-based employee compensation under the intrinsic value method
established by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
If compensation expense had been determined in accordance with
the provisions of SFAS No. 123, the company's net income and per
share amounts would have been reported as follows:
Nine Months Ended Three Months Ended
July 31, July 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net Income as reported $2,757,000 $1,984,000 $ 806,000 $ 797,000
Pro forma stock compensation
expense, net of tax (212,000) (263,000) (71,000) (239,000)
---------- ---------- ---------- ----------
Pro forma net income $2,545,000 $1,721,000 $ 735,000 $ 558,000
========== ========== ========== ==========
Basic income per share:
As reported $ 0.46 $ 0.33 $ 0.14 $ 0.13
======= ======= ======= =======
Pro forma $ 0.42 $ 0.29 $ 0.12 $ 0.09
======= ======= ======= =======
Diluted income per share:
As reported $ 0.45 $ 0.33 $ 0.13 $ 0.13
======= ======= ======= =======
Pro forma $ 0.41 $ 0.29 $ 0.12 $ 0.09
======= ======= ======= =======
2. COMMON STOCK AND PREFERRED STOCK
On March 24, 2004, the company declared a three-for-two stock
split to shareholders of record on April 5, 2004. Accordingly,
2,006,000 additional shares were issued on
April 20, 2004. Common stock has been increased by the par value of
the shares issued with a corresponding decrease in capital in excess
of par value.
On March 19, 2003, the company declared a 20% stock dividend to
shareholders of record on April 2, 2003. On April 23, 2003, the
company issued 656,000 shares of common stock in conjunction with
this dividend. Accordingly, the fair value (based on the quoted
market price as adjusted) of the additional shares issued of
$6,277,000 was charged to retained earnings and credited to common
stock and capital in excess of par value.
In both transactions, cash payments were made to shareholders
in lieu of fractional shares. The basic and diluted weighted
average number of shares outstanding and net income per share
information for all prior reporting periods have been restated to
reflect the effects of the stock split in 2004 and the stock
dividend in 2003.
3. INCOME TAXES
The company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS 109), which requires the asset and liability
method of accounting for deferred income taxes. Deferred tax assets
and liabilities are determined based on the temporary differences
between the financial statement and tax basis of assets and
liabilities. Deferred tax assets or liabilities at the end of each
period are determined using the tax rate in effect at that time.
The total future deferred income tax liability under
SFAS 109 is extremely complicated for any energy company to estimate
due in part to the long-lived nature of depleting oil and gas
reserves and variables such as product prices. Accordingly, the
liability is subject to continual recalculation, revision of the
numerous estimates required, and may change significantly in the
event of such things as major acquisitions, divestitures, product
price changes, changes in reserve estimates, changes in reserve
lives, and changes in tax rates or tax laws.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2004, working capital was $6,942,000, compared with
$6,577,000 at October 31, 2003. Net cash provided by operating
activities for the first nine months of 2004 and 2003 was $3,530,000
and $4,267,000, respectively. The decrease in cash flows from operating
activities can be attributed primarily to a net increase of $1,340,000
in short term investments in 2004 versus a net decrease in short term
investments of $593,000 in 2003. This net increase in investments of
$1,933,000 more than offset cash flow increases from net income, DD&A
and deferred income taxes which totaled approximately $1,400,000.
For the nine months ended July 31, 2004 and 2003, cash used in investing
activities was $4,368,000 and $3,300,000, respectively. Investing activities
primarily included oil and gas exploration and development
expenditures, including Calliope, totaling $3,980,000 and
$3,296,000, respectively. Additional expenditures for oilfield
casing and tubing were incurred during 2004, and are classified as
other long-term assets. The company purchased these tubulars to
insure availability for the current drilling program.
The average return on CREDO's investments during the first nine
months was 5% in 2004 and 7% in 2003. At July 31, 2004,
approximately 65% of the investments were directly invested in
mutual funds and brokerage accounts managed by professional money
managers. Remaining investments are in managed partnerships that
use various strategies to minimize their correlation to stock market
movements. Most of the investments are highly liquid, and the
company believes they represent a responsible approach to cash
management. In the company's opinion, the greatest investment risk
is the potential for negative market impact from unexpected, major
adverse news, such as the September 11th terrorist attacks.
Existing working capital and anticipated cash flow are expected
to be sufficient to fund 2004 operations. Because earnings are
anticipated to be reinvested in operations, cash dividends are not
expected to be paid in the foreseeable future. Commitments for
future capital expenditures were not material at July 31, 2004. The
company has no defined benefit plans and no obligations for post
retirement employee benefits.
PRODUCT PRICES AND PRODUCTION
Although product prices are key to the company's ability to
operate profitably and to budget capital expenditures, they are
beyond the company's control and are difficult to predict. Since
1991, the company has periodically hedged natural gas prices by
forward selling a portion of its estimated production in the NYMEX
futures market. This is generally done when (i) the price
relationship (the "basis") between the futures markets and the cash
markets where the company sells its gas is stable within historical
ranges, and (ii) in the company's opinion, the current price is
adequate to insure reasonable returns at a time when downside price
risks appear to be substantial. The company closes its hedges by
purchasing offsetting "long" positions in the futures market at then
prevailing prices. Accordingly, the gain or loss on the hedge
position will depend on futures prices at the time offsetting "long"
positions are purchased. Hedging gains and losses are included in
revenues from oil and gas sales. The company believes its most
significant hedging risk is that expected correlations in price
movements as discussed above do not occur, and thus, that gains or
losses in one market are not fully offset by opposite moves in the
other market.
The company recognizes all derivatives on the balance sheet at
fair value at the end of each period. Changes in the fair value of a
cash flow hedge are recorded in Other Comprehensive Income on the
Consolidated Balance Sheets and then are reclassified into the
Consolidated Statement of Earnings as the underlying hedged item
affects earnings. Amounts reclassified into earnings related to
natural gas hedges are included in oil and gas sales.
The company realized hedging losses of $486,000 and $388,000 for the
nine months ended July 31, 2004 and 2003, respectively. The company
realized hedging losses of $429,000 and hedging gains of $49,000 for
the comparable quarters ended July 31, 2004 and 2003. At July 31, 2004
the company has recorded in other comprehensive income net
deferred losses of approximately $367,000 ($264,000 net of tax)
related to natural gas hedging transactions.
At third quarter-end, the company had open hedge positions
totaling 200 MMcfg covering the months of September and October 2004
at an average NYMEX price of $4.80 per Mcf. Also at July 31, 2004,
the August hedge was closed and a deferred loss of $112,000 was
realized. Subsequent to third quarter end, the September hedge was
closed and a deferred loss of $31,000 was realized. The only
remaining hedge is for the month of October 2004. Average gas prices
in the company's market areas are expected to be 15% to 17% below
NYMEX prices due to basis differentials and transportation costs.
During 2004 the company entered into a bank hedging line of
credit facility with a maximum threshold amount of $2,000,000. At
July 31, 2004, 30% of the company's open natural gas hedge positions
were covered by this agreement. The company also hedged the basis
differential between the NYMEX and Panhandle Eastern Pipeline Co.
prices on 200 MMcfg for the months of May 2004 through October 2004.
The following table sets forth the components of Comprehensive
Income for each of the periods presented:
Nine Months Ended Three Months Ended
July 31, July 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net Income $2,757,000 $1,984,000 $ 806,000 $ 797,000
Other comprehensive income
(loss), net of tax:
Change in fair value
of futures contracts
used for natural gas
hedging (444,000) 196,000 198,000 233,000
---------- ---------- ---------- ----------
Comprehensive income $2,313,000 $2,180,000 $1,004,000 $1,030,000
========== ========== ========== ==========
Oil and gas sales volume and price comparisons for the
indicated periods are set forth below. Price realizations include
the sales price and hedging gains and losses.
Nine Months Nine Months
Ended July 31, 2004 Ended July 31, 2003 Percent Percent
------------------- ------------------- Volume Price
Product Volume Price Volume Price Change Change
--------- -------- --------- -------- ------- ------ ------
Gas (Mcf) 1,278,000 $ 4.58(1) 987,300 $ 4.35(3) +29% + 5%
Oil (bbls) 32,900 $32.66 25,900 $27.65 +27% +18%
Three Months Three Months
Ended July 31, 2004 Ended July 31, 2003 Percent Percent
------------------- ------------------- Volume Price
Product Volume Price Volume Price Change Change
--------- -------- --------- -------- ------- ------ ------
Gas (Mcf) 417,000 $ 4.37(2) 356,600 $ 4.91(4) +17% -11%
Oil (bbls) 11,700 $34.63 8,600 $26.41 +36% +31%
_____________________________
(1) Includes $0.38 Mcf hedging loss.
(2) Includes $1.03 Mcf hedging loss.
(3) Includes $0.39 Mcf hedging loss.
(4) Includes $0.14 Mcf hedging gain.
OPERATIONS
The company's business focuses on two core projects - natural
gas drilling along the shelf of the Northern Anadarko Basin of
Oklahoma and application of its patented Calliope Gas Recovery
System. The company believes that, in combination, these two
projects provide an excellent (and possibly unique) balance for
achieving its goal of adding long-lived gas reserves and production
at reasonable costs and risks.
Anadarko Shelf Drilling Program. The company drills primarily
for natural gas on its 40,000 gross acre inventory located along the
northern shelf of the Anadarko Basin of Oklahoma. During fiscal
2004, 13 wells have been drilled in this area of which nine are
producers and four are dry holes. This brings the total wells
drilled on the acreage to 49 of which 37 have been completed as
producers. Four additional wells are currently on the fall drilling
schedule.
Previously the company reported that its Horseshoe #1-7 well
encountered six feet of porous Morrow sand that drilling data and
electric logs indicated would be productive. However, the
subsequent completion did not recover commercial amounts of gas, and
the well was plugged. This was the first well drilled on the
company's 1,920 gross acre Horseshoe Prospect in Harper County.
Additional wells are expected to be drilled. CREDO is the operator
and owns a 49% working interest.
Approximately twelve miles to the northwest, the Owens 3C #1-28
is the third well drilled on the company's 2,560 gross acre Buffalo
Creek Prospect in Harper County. The 6,900-foot well offset the
company's Owens #1-21 discovery well that was recently completed as
an Oswego oil producer. The Owens 3C encountered 18 feet of
relatively tight Oswego limestone. It is currently testing small
amounts of oil and gas and is expected to be a marginal well. CREDO
owns a 30% working interest.
Also on the Buffalo Creek Prospect, the Owens A #1 was drilled
to test the Morrow, Chester, Oswego and deeper zones. The company
believes that the 8,800-foot well will be noncommercial.
Accordingly, it elected not to participate in completion of the
well. CREDO owned a 29% working interest.
About 40 miles to the south, the Skyler #1-6 is the first well
drilled on the company's 1,280 gross acre Gage Prospect in Ellis
County. The 9,175-foot well encountered approximately
30 feet of Morrow sand that appears to be productive. The well is
currently awaiting pipeline connection before being completed for
production. An offset is planned for the first quarter of 2005.
CREDO owns a 51% working interest and is the operator.
Approximately 25 miles to the north, the company drilled a rank
wildcat on its 1,920 gross acre Glacier Prospect located in Harper
County targeting the Morrow and Chester formations. The 7,500-foot
well encountered only two feet of porous Morrow channel sand and was
plugged due to the likelihood of marginal production. An offset to
be drilled this year will target a thicker portion of the channel
sand. CREDO is the operator and owns a 65% working interest.
About five miles to the west, the Derby #2-22 was drilled on
the company's 17,000 gross acre Sand Creek Prospect. The 7,400-foot
well did not encounter productive Morrow or Chester sands and was a
dry hole. Another well is planned for the first quarter of 2005.
CREDO owns a 32% working interest and is the operator.
Calliope Gas Recovery Technology. The company owns the
exclusive right to a patented technology known as the Calliope Gas
Recovery System. Calliope can achieve substantially lower flowing
bottom hole pressure than conventional production methods because it
does not rely on reservoir pressure to lift liquids. In many gas
wells, lower bottom hole pressure translates into recovery of
substantial additional gas reserves.
This year, the company has installed its patented Calliope Gas
Recovery System on three wells located in Oklahoma. A fourth well
is currently being prepared for an installation and two additional
systems are scheduled for installation.
Two of the three completed installations are prototypes to test
Calliope on wells with known reservoir damage caused by the "parting
shots" of previous operators. These prototypes represent very
rigorous challenges for Calliope which could further expand its
application envelope. The company is performing reservoir
treatments on the wells designed to mitigate the reservoir damage,
including fracture stimulation of one well. Additional procedures
to increase production are being reviewed. CREDO owns an 80% working
interest and is the operator.
Many older, low pressure gas wells have wellbore and reservoir
damage caused over time by numerous factors. Treatment procedures
to remediate such damage are generally not practical in low pressure
reservoirs because the treatment fluids load-up the well and are
often impossible to recover. It is the company's intent to
demonstrate that Calliope can normally remove such treatment fluids,
thus substantially increasing the probability of successfully
treating low pressure reservoirs.
The company recently installed a Calliope system on the
7,800-foot Jacobs well located in Grady County, Oklahoma. The well
had produced 3.4 Bcfg (billion cubic feet of gas) but had been dead
for four years at the time the company took over operations. The
system has been operational for only a few days and no data is
currently available regarding how the well might respond. CREDO is
operator and owns a 70% working interest.
A second Jacobs well located in the same area is currently
being prepared for a Calliope installation. The primary producing
zone in the well was abandoned by the previous operator in favor of
recompleting the well in an up-hole zone. Accordingly, the company
must squeeze the up-hole zone and then drill out plugs in order to
regain access to the primary productive zone which produced 13.3 Bcfg
and has been dead for four years. Work to regain access to
that zone is currently in progress. CREDO owns 81% and is the
operator.
The company is preparing to install Calliope systems on two
additional wells. Both wells are located in Canadian County,
Oklahoma and produced from the Morrow formation at 10,000 feet.
They had cumulative production ranging up to 16.2 Bcfg. The wells
were uneconomic or dead at the time of purchase.
Calliope has proven to be reliable and flexible over a wide
range of applications on wells the company owns and operates. It
has also proven to be consistently successful. This has resulted in
an impressive track record for the new technology. Accordingly, the
company has recently begun implementing strategies designed to widen
the envelope of wells on which Calliope should be installed.
Previously discussed strategies have been implemented to
increase the number of wells on which Calliope will be installed.
Among other things, the company has retained highly qualified
personnel to execute its strategies and has completed the Calliope
multimedia presentation. Other related information is considered
proprietary at this time.
RESULTS OF OPERATIONS
Nine Months Ended July 31, 2004 Compared to Nine Months Ended July
31, 2003
For the nine months ended July 31, 2004, net income rose
39% to $2,757,000 compared to $1,984,000 last year. Higher net
income resulted primarily from a 29% increase in production volumes
and a 7% increase in product prices.
Total revenues rose 32% to $7,562,000 compared to $5,718,000
last year. Oil and gas sales rose 38% to $6,932,000 compared to
$5,014,000 last year. Total natural gas price realizations,
including the effect of hedging transactions, rose 5% to $4.58 per
Mcf compared to $4.35 last year. Net wellhead prices for oil rose
18% to $32.66 per barrel compared to $27.65 last year. Natural gas
production rose 29% to 1,278,000 Mcf compared to 987,300 Mcf last
year and oil production rose 27% to 32,900 bbls compared to
25,900 bbls last year. The effect of these higher volumes and
prices was to increase oil and gas sales by $1,918,000. Operating
income increased 15% due to an increase in drilling and production
overhead income from new operated wells. Investment income and other
decreased to $186,000 compared to $318,000, for the same nine month
period last year due to a shift to more conservative investments
and general market declines.
Total costs and expenses increased 22% to $3,732,000 in the
first nine months of fiscal 2004 compared to $3,062,000 last year.
Oil and gas production expenses rose 26%, or $305,000, due primarily
to increased production taxes resulting from increased production
volumes and prices. Depreciation, depletion and amortization
increased 32% primarily due to increased production and an increase
in the amortizable full cost pool base. General and administrative
expenses increased 8% due to increases in salaries and wages,
consulting fees relating to increased regulatory requirements as
well as inflationary pressures. Interest expense primarily relates
to the accrual of interest on the exclusive license agreement
obligation. Income taxes were provided at 28% in both 2004 and 2003.
Three Months Ended July 31, 2004 Compared to Three Months Ended July
31, 2003
For the three months ended July 31, 2004, net income rose one
percent to $806,000 compared to $797,000 last year. Higher net
income resulted primarily from a 19% increase in production volumes
and an 6% decrease in product prices.
Total revenues rose nine percent to $2,439,000 compared to
$2,243,000 last year. Oil and gas sales rose 12% to $2,226,000
compared to $1,980,000 the same quarter last year. Total natural
gas price realizations, including the effect of hedging
transactions, declined 11% to $4.37 per Mcf compared to $4.91 last
year. Net wellhead prices for oil rose 31% to $34.63 per barrel
compared to $26.41 last year. Natural gas production rose 17% to
417,000 Mcf compared to 356,600 Mcf last year and oil production
rose 36% to 11,700 bbls compared to 8,600 bbls last year. The
effect of these higher volumes and prices was to increase oil and
gas sales by $246,000. Operating income increased 13% due to an
increase in drilling and production overhead income from new
operated wells. Investment income and other decreased to
$61,000 compared to $128,000 last year due to the continuing
market declines experienced during the third quarter of 2004.
Total costs and expenses increased 16% to $1,319,000 in the
third quarter of fiscal 2004 compared to $1,136,000 the same quarter
last year. Oil and gas production expenses rose 14%, or $65,000,
due primarily to increased production taxes resulting from increased
production volumes and prices as well as increased oilfield costs.
Depreciation, depletion and amortization increased 34% primarily due
to increased production and an increase in the amortizable full cost
pool base. General and administrative expenses increased 3% due to
inflationary pressures.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the
company carried out an evaluation, under the supervision and with
the participation of the company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation
of its "disclosure controls and procedures" pursuant to Securities
Exchange Act Rule 13a-14(c). Disclosure controls and procedures are
controls and procedures that are designed to ensure that information
required to be disclosed by the company in reports filed or
submitted under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Based upon that evaluation,
the company's Chief Executive Officer and Chief Financial Officer
concluded that the company's disclosure controls and procedures are
effective for these purposes as of the date of the evaluation.
There have been no significant changes in the company's
internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
FORWARD-LOOKING STATEMENTS
Certain information included in this quarterly report and other
materials filed by the company with the Commission contain
forward-looking statements relating to the company's operations and
the oil and gas industry. Such forward-looking statements are based
on management's current projections and estimates and are identified
by words such as "expects," "intends," "plans," "projects,"
"anticipates," "believes," "estimates" and similar words. These
statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual results may differ materially from what
is expressed or forecasted in such forward-looking statements.
Among many factors that could cause actual results to differ
materially are: (i) natural gas and crude oil price fluctuations,
(ii) the company's ability to acquire oil and gas properties that
meet its objectives and to identify prospects for drilling, and
(iii) potential delays or failure to achieve expected production
from existing and future exploration and development projects. In
addition, such forward-looking statements may be affected by general
domestic and international economic and political conditions.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification by Chief Executive Officer under
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Officer under
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer and
Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act (18 U.S.C. Section 1350)
(b) Reports on Form 8-K
On June 15, 2004 CREDO Petroleum Corporation filed a current
report on Form 8-K reporting under Item 9 pursuant to Item 12 that
we had issued a press release announcing our financial results for
the quarter ended April 30, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: September 14, 2004
By: /s/ James T. Huffman
-------------------------------------
James T. Huffman
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ James P. Garrett, Jr.
-------------------------------------
James P. Garrett, Jr.
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 15D-14
OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James T. Huffman, Chief Executive Officer of CREDO Petroleum Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
CREDO Petroleum Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the Registrant as of, and for,
the periods presented in this report;
4. The Registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e) for the Registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's
internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter (the
Registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the Registrant's
internal control over financial reporting; and
5. The Registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant's
auditors and the audit committee of Registrant's Board of
Directors:
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the Registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Registrant's internal control over financial
reporting.
Date: September 14, 2004
/s/ James T. Huffman
-------------------------------
James T. Huffman
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 15D-14
OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James P. Garrett, Jr., Vice President and Chief Financial Officer
of CREDO Petroleum Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
CREDO Petroleum Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the Registrant as of, and for,
the periods presented in this report;
4. The Registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e) for the Registrant and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's
internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter (the
Registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the Registrant's
internal control over financial reporting; and
5. The Registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant's
auditors and the audit committee of Registrant's Board of
Directors:
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the Registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Registrant's internal control over financial
reporting.
Date: September 14, 2004
/s/ James P. Garrett, Jr.
-------------------------------
James P. Garrett, Jr.
Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of CREDO Petroleum
Corporation (the "Company") on Form 10-QSB as filed with the
Securities and Exchange Commission on the date hereof (the
"Report"), we, James T. Huffman and James P. Garrett, Jr., President
and Chief Executive Officer, and Vice President and Chief Financial
Officer, respectively, of the Company, certify, pursuant to
18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to our knowledge:
1. The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
2. The information contained in the Report fairly presents,
in all material respects, the financial condition and
results of operations of the Company.
September 14, 2004
/s/ James T. Huffman
-------------------------------
James T. Huffman
President and Chief Executive Officer
/s/ James P. Garrett, Jr.
-------------------------------
James P. Garrett, Jr.
Vice President and Chief Financial Officer