UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q/A

 

(Mark One)

 

 

For the quarterly period ended January 31, 2008

 

 

For the transition period from                        to                      

 

Commission File Number:   0-8877

 

CREDO PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

303-297-2200

(Registrant’s telephone number, including area code)

 

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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o		Accelerated filer  x
Non-accelerated filer o		Smaller reporting company  o
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No   x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, net of treasury stock, as of the latest practicable date.

 

Date		Class		Outstanding
Sept. 15, 2008		Common stock, $.10 par value		9,295,000

 

 

Table of Contents

 

EXPLANATORY NOTE

 

On September 2, 2008, in connection with preparing its quarterly report for third quarter 2008, management of CREDO Petroleum Corporation (the “company”) and the Audit Committee of its Board of Directors determined that the contemporaneous formal documentation it had historically prepared to support its initial hedge designations in connection with the company’s natural gas hedging program does not meet the technical requirements to qualify for cash flow hedge accounting treatment in accordance with SFAS 133.  The primary reason for this determination was that the formal hedge documentation lacks specificity of the hedged items and therefore, the cash flow designations failed to meet hedge documentation requirements for cash flow hedge accounting treatment.  Consequently, the unrealized gain or loss should have been recorded in the consolidated statements of operations as a component of income before income taxes.  Under the cash flow accounting  treatment used by the company, the fair values of the hedge contracts was recognized in the consolidated balance sheets with the resulting unrealized gain or loss, net of income taxes, recorded initially in accumulated other comprehensive income and later reclassified through earnings when the hedged production affected earnings.

 

The company will restate its consolidated financial statements for fiscal years ended October 31, 2005, 2006, 2007 and the first and second quarters of fiscal year ending October 31, 2008.  There is no effect in any period on overall cash flows, EBITDA, total assets, total liabilities or total stockholders’ equity.  The restatement did not have any impact on any of the Company’s financial covenants under its line of credit.  Details of the effect of the restatement are indicated in Note 1 to the Consolidated Financial Statements.

 

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CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

 

Quarterly Report on Form 10-Q/A For the Period Ended January 31, 2008

 

TABLE OF CONTENTS

		Page No.
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
Consolidated Balance Sheets
As of January 31, 2008 (Unaudited) and October 31, 2007		4
Consolidated Statements of Operations
For the Three Months Ended January 31, 2008 and 2007 (Unaudited)		5
Consolidated Statements of Cash Flows
For the Three Months Ended January 31, 2008 and 2007 (Unaudited)		6
Notes to Consolidated Financial Statements (Unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
Signatures		23

 

The terms “CREDO”, “Company”, “we”, “our”, and “us” refer to CREDO Petroleum Corporation and its subsidiaries unless the context suggests otherwise.

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

 

		January 31,			October 31,
		2008			2007
		(Restated)			(Restated)
ASSETS
Current Assets:
Cash and cash equivalents		$	5,708,000		$	7,285,000
Short-term investments		6,305,000			6,383,000
Receivables:
Accrued oil and gas sales		2,219,000			1,647,000
Trade		694,000			602,000
Derivative Assets		127,000			443,000
Other current assets		145,000			55,000
Total current assets		15,198,000			16,415,000
Long-term assets:
Oil and gas properties, at cost, using full cost method: Unevaluated oil and gas properties		9,593,000			7,791,000
Evaluated oil and gas properties		52,732,000			51,691,000
Less: accumulated depreciation, depletion and amortization of oil and gas properties		(22,934,000		)	(22,108,000		)
Net oil and gas properties, at cost, using full cost method		39,391,000			37,374,000
Exclusive license agreement, net of amortization of $519,000 in 2008 and $466,000 in 2007		181,000			198,000
Compressor and tubular inventory to be used in development		1,066,000			1,090,000
Other, net		290,000			272,000
Total assets		$	56,126,000		$	55,349,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	870,000		$	1,639,000
Revenue distribution payable		1,005,000			979,000
Other accrued liabilities		194,000			852,000
Income taxes payable		486,000			434,000
Total current liabilities		2,555,000			3,904,000
Long Term Liabilities:
Deferred income taxes, net		9,718,000			9,204,000
Exclusive license obligation, less current obligations of $77,000 in 2008 and $70,000 in 2007		85,000			85,000
Asset retirement obligation		1,040,000			1,016,000
Total liabilities		13,398,000			14,209,000
Commitments
Stockholders’ Equity:
Preferred stock, no par value, 5,000,000 shares authorized, none issued		—			—
Common stock, $.10 par value, 20,000,000 shares authorized, 9,510,000 shares issued in 2008 and in 2007		951,000			951,000
Capital in excess of par value		15,928,000			15,913,000
Treasury stock at cost, 215,000 shares in 2008 and 2007		(506,000		)	(506,000		)
Retained earnings		26,355,000			24,782,000
Total stockholders’ equity		42,728,000			41,140,000
Total liabilities and stockholders’ equity		$	56,126,000		$	55,349,000

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended
		January 31,
		2008			2007
		(Restated)			(Restated)
REVENUES:
Oil and gas sales		$	3,733,000		$	3,412,000
Investment income (loss) and other		(5,000		)	247,000
		3,728,000			3,659,000
COSTS AND EXPENSES:
Oil and gas production		852,000			913,000
Depreciation, depletion and amortization		853,000			958,000
General and administrative		332,000			278,000
Interest		1,000			6,000
		2,038,000			2,155,000
INCOME FROM OPERATIONS		1,690,000			1,504,000
GAIN (LOSS) ON DERIVATIVE CONTRACTS:
Realized gains (losses) from derivative contracts		847,000			396,000
Unrealized (gains) losses from derivative contracts		(316,000		)	(371,000		)
		531,000			25,000
INCOME BEFORE INCOME TAXES		2,221,000			1,529,000
INCOME TAXES		(648,000		)	(436,000		)
NET INCOME		$	1,573,000		$	1,093,000
EARNINGS PER SHARE OF COMMON STOCK BASIC		$	.17		$	.12
EARNINGS PER SHARE OF COMMON STOCK DILUTED		$	.17		$	.12
Weighted average number of shares of Common Stock and dilutive securities:
Basic		9,295,000			9,261,000
Diluted		9,356,000			9,387,000

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

		Three Months Ended
		January 31,
		2008			2007
		(Restated)			(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	1,573,000		$	1,093,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		853,000			958,000
Unrealized loss on derivative contracts		316,000			371,000
Deferred income taxes		514,000			328,000
(Gain) loss on short term investments		78,000			(231,000		)
Compensation expense related to stock options granted		15,000			57,000
Other		24,000			3,000
Changes in operating assets and liabilities:
Proceeds from short-term investments		—			719,000
Purchase of short-term investments		—			(1,000,000		)
Accrued oil and gas sales		(572,000		)	307,000
Trade receivables		(92,000		)	(367,000		)
Other current assets		(90,000		)	(169,000		)
Accounts payable and accrued liabilities		(1,045,000		)	(629,000		)
Income taxes payable		52,000			99,000
NET CASH PROVIDED BY OPERATING ACTIVITIES		1,626,000			1,539,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties		(3,200,000		)	(3,005,000		)
Changes in other long-term assets		(3,000		)	(56,000		)
NET CASH USED IN INVESTING ACTIVITIES		(3,203,000		)	(3,061,000		)
CASH FLOWS FROM FINANCING ACTIVITIES		—			—
NET CASH PROVIDED BY FINANCING ACTIVITIES		—			—
DECREASE IN CASH AND CASH EQUIVALENTS		(1,577,000		)	(1,522,000		)
CASH AND CASH EQUIVALENTS:
Beginning of period		7,285,000			4,577,000
End of period		$	5,708,000		$	3,055,000
Supplemental cash flow information:
Cash paid during the period for income taxes		$	100,000		$	—
Additions to oil and gas properties in current liabilities		$	356,000		$	—

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements (Unaudited)

January 31, 2008

 

1.             BASIS OF PRESENTATION

 

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-Q/A 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 adjustments) 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 Annual Report on Form 10-K/A for the fiscal year ended October 31, 2007.

 

Certain 2007 amounts have been reclassified to conform to the current year presentation.  Such reclassification had no effect on net income or shareholder equity.

 

On September 2, 2008, in connection with preparing its quarterly report for third quarter 2008, management of CREDO Petroleum Corporation (the “company”) and the Audit Committee of its Board of Directors determined that the contemporaneous formal documentation it had historically prepared to support its initial hedge designations in connection with the company’s natural gas hedging program does not meet the technical requirements to qualify for cash flow hedge accounting treatment in accordance with SFAS 133.  The primary reason for this determination was that the formal hedge documentation lacks specificity of the hedged items and therefore, the cash flow designations failed to meet hedge documentation requirements for cash flow hedge accounting treatment.  Consequently, the unrealized gain or loss should have been recorded in the consolidated statements of operations as a component of income before income taxes.  Under the cash flow accounting  treatment used by the company, the fair values of the hedge contracts was recognized in the consolidated balance sheets with the resulting unrealized gain or loss, net of income taxes, recorded initially in accumulated other comprehensive income and later reclassified through earnings when the hedged production affected earnings.

 

The company will restate its consolidated financial statements for fiscal years ended October 31, 2005, 2006, 2007 and the first and second quarters of fiscal year ending October 31, 2008.  There is no effect in any period on overall cash flows, EBITDA, total assets, total liabilities or total stockholders’ equity.  The restatement did not have any impact on any of the Company’s financial covenants under its line of credit.  The primary financial statement items impacted by this restatement are indicated below:

 

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Consolidated Statements of Income

 

		January 31, 2008						January 31, 2007
		As Previously						As Previously
Three Months Ended		Reported			Restated			Reported			Restated
Oil & Gas Sales		4,580,000			3,733,000			3,808,000			3,412,000
Total Revenues		4,575,000			3,728,000			4,055,000			3,659,000
Income from Operations		2,537,000			1,690,000			1,900,000			1,504,000
Realized Gains (Losses) from derivative contracts		—			847,000			—			396,000
Unrealized Gains (Losses) from derivative contracts		—			(316,000		)	—			(371,000		)
Income Before Taxes		2,537,000			2,221,000			1,900,000			1,529,000
Income Taxes		(736,000		)	(648,000		)	(536,000		)	(436,000		)
Net Income		1,801,000			1,573,000			1,364,000			1,093,000
Earnings per share -
Basic		$	0.19		$	0.17		$	0.15		$	0.12
Diluted		$	0.19		$	0.17		$	0.15		$	0.12

 

Consolidated Balance Sheets

 

		January 31, 2008						October 31, 2007
		As Previously						As Previously
		Reported			Restated			Reported			Restated
Accumulated other comprehensive income (loss)		91,000			—			319,000			—
Retained earnings		26,264,000			26,355,000			24,463,000			24,782,000

 

Consolidated Statements of Cash Flows

 

January 31, 2008

January 31, 2007

As Previously

As Previously

Three Months Ended

Reported

Restated

Reported