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UNITED
STATES Washington, D.C. 20549
Form 10-Q
(Mark One)
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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.
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
Quarterly Report on Form 10-Q For the Period Ended April 30, 2008
TABLE OF CONTENTS
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
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
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)
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)
The accompanying notes are an integral part of these consolidated financial statements.
5 CREDO PETROLEUM CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited) April 30, 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 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 for the fiscal year ended October 31, 2007.
Certain 2007 amounts have been reclassified to conform to the current year presentation. Such reclassifications had no effect on net income or shareholders’ equity.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the reporting period. The company bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances. Although actual results may differ from these estimates under different assumptions or conditions, the company believes that its estimates are reasonable and that actual results will not vary significantly from the estimated amounts in the ordinary course of business.
3. STOCK-BASED COMPENSATION
The CREDO Petroleum Corporation 2007 Stock Option Plan (the 2007 Plan) is described in the Notes to Consolidated Financial Statements in the company’s Annual Report on Form 10-K for the year ended October 31, 2007. No options have been granted under the 2007 Plan. The CREDO Petroleum Corporation 1997 Stock Option Plan (the 1997 Plan) expired on July 29, 2007. No additional options can be granted under the 1997 Plan. However, all outstanding options granted under the 1997 Plan will continue to be governed by the terms of that Plan.
For the six months ended April 30, 2008 and 2007, the company recognized stock based compensation expense of $30,000 and $110,000 respectively. For the three months ended April 30, 2008 and 2007, the company recognized compensation expense of $15,000 and $53,000, respectively. The estimated unrecognized compensation cost from unvested stock options as of April 30, 2008 was approximately $93,000 which is expected to be recognized over an average of 2 years.
No options were granted during the six months ended April 30, 2008 and the fair value of the 40,000 options granted during the six months ended April 30, 2007 was estimated on the date of grant using a Black-Scholes option pricing model. The weighted average assumptions used in the option pricing model for the six months ended April 30, 2007 were: volatility, 50.84%; expected option term, 2.5 years; risk-free interest rate, 4.58%; and expected dividend yield, 0%.
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Plan activity for the six months ended April 30, 2008 is set forth below:
4. NATURAL GAS PRICE HEDGING
The company periodically hedges the price of a portion of its estimated natural gas production when the potential for significant downward price movement is anticipated. Hedging transactions typically take the form of forward short positions and collars on the NYMEX futures market, and are closed by purchasing offsetting positions. Such hedges, which are accounted for as cash flow hedges, do not exceed estimated production volumes, are expected to have reasonable correlation between price movements in the futures market and the cash markets where the company’s production is located, and are authorized by the company’s Board of Directors. Hedges are expected to be closed as related production occurs but may be closed earlier if the anticipated downward price movement occurs or if the company believes that the potential for such movement has abated.
The company recognizes all derivatives (consisting solely of cash flow hedges) on its balance sheet at fair value at the end of each period. Changes in the fair value of a cash flow hedge are recorded in Stockholders’ Equity as Accumulated Other Comprehensive Income on the Consolidated Balance Sheets and then are transferred into the Consolidated Statement of Operations as the underlying hedged item affects earnings. Amounts reclassified into earnings related to natural gas hedges are included in gas sales.
Hedging gains and losses are recognized as adjustments to gas sales as the hedged product is produced. The company had hedging gains of $852,000 ($605,000 net of income tax) and $986,000 ($705,000 net of income tax) in the six months ended April 30, 2008 and 2007, respectively. For the three months ended April 30, 2008, the company had hedging gains of $5,000 ($4,000 after tax) and $590,000 ($422,000 after tax) for the same period in 2007. Any hedge ineffectiveness, which was not material for any period, is immediately recognized in gas sales.
Open hedge contracts are indexed to the NYMEX. Periodically, the company enters into contracts indexed to Panhandle Eastern Pipeline Company for Texas, Oklahoma mainline. For comparative purposes, hedges indexed to Panhandle Eastern Pipeline Company are expressed on a NYMEX basis. For hedges indexed to Panhandle Eastern Pipeline Company, the individual month price (basis) differentials between the NYMEX and Panhandle Eastern Pipeline Company range from minus $1.45 in the winter months to minus $0.90 in the spring months.
Unrecognized gains and losses on hedge contracts at April 30, 2008 totaled a loss of $3,881,000 ($2,775,000 after income tax). These amounts have been included in “Accumulated Other Comprehensive Income” ($2,775,000), “Derivative Liabilities” ($3,433,000) and “Derivative Liabilities Due in More than
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1 Year” ($ 448,000) and deferred income taxes of $1,106,000. These contracts covered 1,660 MMBtus at average monthly NYMEX basis prices ranging from $7.83 to $10.05.
The company has a hedging line of credit with its bank which is available, at the discretion of the company, to meet margin calls. To date, the company has not used this facility and maintains it only as a precaution related to possible margin calls. The maximum credit line is $5,900,000 with interest calculated at the prime rate. The facility is unsecured and has covenants that require the company to maintain $3,000,000 in cash or short term investments, none of which are required to be maintained at the company’s bank, and prohibits funded debt in excess of $500,000. It expires on November 15, 2010.
5. COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The components of comprehensive income for the three and six months ended April 30, 2008 and 2007 are as follows:
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