CREDO PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

Colorado		84-0772991
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
1801 Broadway, Suite 900, Denver, Colorado		80202
(Address of principal executive offices)		(Zip Code)

 

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ITEM 1. FINANCIAL STATEMENTS

CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

		January 31,				October 31,
		2006				2005
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	3,155,000			$	1,935,000
Short-term investments			5,706,000				5,495,000
Receivables:
Accrued oil and gas sales			2,354,000				2,776,000
Trade			1,705,000				1,003,000
Other current assets			233,000				245,000
Total current assets			13,153,000				11,454,000
Long-term assets:
Oil and gas properties, at cost, using full cost method:
Unevaluated oil and gas properties			4,339,000				3,452,000
Evaluated oil and gas properties			38,599,000				36,121,000
Less: accumulated depreciation, depletion and amortization of oil and gas properties			(15,730,000	)			(15,022,000	)
Net oil and gas properties, at cost, using full cost method			27,208,000				24,551,000
Exclusive license agreement, net of amortization of $379,000 in 2006 and $361,000 in 2005			320,000				338,000
Inventory			1,097,000				1,288,000
Other assets			220,000				213,000
Total assets		$	41,998,000			$	37,844,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued liabilities		$	4,769,000			$	3,426,000
Income taxes payable			420,000				331,000
Total current liabilities			5,189,000				3,757,000
Long Term Liabilities:
Deferred income taxes, net			6,395,000				5,978,000
Exclusive license obligation, less current obligations of $64,000 in 2006 and 2005			233,000				233,000
Asset retirement obligation			901,000				929,000
Total liabilities			12,718,000				10,897,000
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 2006 and 2005			951,000				951,000
Capital in excess of par value			14,140,000				13,933,000
Treasury stock, 347,000 shares in 2006 and 393,000 in 2005			—				(125,000	)
Accumulated other comprehensive income (loss)			—				(306,000	)
Retained earnings, net of $6,272,000 related to 20% stock dividend in 2003			14,189,000				12,494,000
Total stockholders’ equity			29,280,000				26,947,000
Total liabilities and stockholders’ equity		$	41,998,000			$	37,844,000

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,
		2006				2005
REVENUES:
Oil and gas sales		$	4,120,000			$	2,385,000
Operating			173,000				159,000
Investment income and other			245,000				62,000
			4,538,000				2,606,000
COSTS AND EXPENSES:
Oil and gas production			1,004,000				488,000
Depreciation, depletion and amortization			738,000				477,000
General and administrative			433,000				443,000
Interest			9,000				9,000
			2,184,000				1,417,000
INCOME BEFORE INCOME TAXES			2,354,000				1,189,000
INCOME TAXES			(659,000	)			(333,000	)
NET INCOME		$	1,695,000			$	856,000
EARNINGS PER SHARE OF COMMON STOCK BASIC		$	.19			$	.09
EARNINGS PER SHARE OF COMMON STOCK DILUTED		$	.18			$	.09
Weighted average number of shares of Common Stock and dilutive securities:
Basic			9,137,000				9,056,000
Diluted			9,475,000				9,249,000

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,
		2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	1,695,000			$	856,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization			738,000				477,000
Deferred income taxes			417,000				385,000
Compensation expense related to stock options granted			60,000				53,000
Other			—				30,000
Changes in operating assets and liabilities:
Proceeds from short-term investments			193,000				1,317,000
Purchase of short-term investments			(404,000	)			(354,000	)
Accrued oil and gas sales			422,000				363,000
Trade receivables			(702,000	)			221,000
Other current assets			318,000				(192,000	)
Accounts payable and accrued liabilities			1,343,000				(102,000	)
Income taxes payable			89,000				(12,000	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			4,169,000				3,042,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties			(3,539,000	)			(2,343,000	)
Proceeds from sale of oil and gas properties			146,000				—
Changes in other long-term assets			172,000				(34,000	)
NET CASH USED IN INVESTING ACTIVITIES			(3,221,000	)			(2,377,000	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options			272,000				—
Purchase of treasury stock			—				(8,000	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			272,000				(8,000	)
INCREASE IN CASH AND CASH EQUIVALENTS			1,220,000				657,000
CASH AND CASH EQUIVALENTS:
Beginning of period			1,935,000				518,000
End of period		$	3,155,000			$	1,175,000
Supplemental cash flow information:
Cash paid during the period for income taxes		$	240,000			$	—
Cash paid during the period for interest		$	—			$	—

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

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Notes To Consolidated Financial Statements (Unaudited)

January 31, 2006

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, 2005.

The company effected a three-for-two stock split in the third fiscal quarter of 2005. All share and per share amounts discussed and disclosed in this Quarterly Report on Form 10-Q reflect the effect of that stock split.

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 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.

3. STOCK-BASED COMPENSATION

The company currently has one stock-based employee compensation plan, which 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, 2005. Prior to November 1, 2005, the company accounted for this plan under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees , and related interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation . No stock-based employee compensation expense was recognized in the company’s Consolidated Statement of Operations prior to November 1, 2005, as all options granted under the company’s stock-based compensation plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective November 1, 2005, the company adopted the fair value recognition provisions of SFAS No. 123 (R), Share Based Payment , using the modified-retrospective-transition method. Under this transition method, the company restated the results of all prior periods back to the beginning of fiscal 1997 (the fiscal year of inception for this stock-based compensation plan) in accordance with the original provisions of SFAS No. 123. The cumulative effect of this restatement was an increase of $1,447,000 to capital in excess of par value and a decrease to retained earnings in the same amount. For the three months ended January 31, 2006 and 2005, the company recognized compensation expense related to its stock option plan of $60,000 and $53,000, respectively. The company has not made any option grants during fiscal 2006. If option grants are made in the future, compensation expense for all such share-based payments granted, based upon the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R) will also be included in compensation expense.

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		Three Months Ended
		January 31,
		2006				2005
Net income		$	1,695,000			$	856,000
Other comprehensive income:
Change in fair value of derivatives			425,000				606,000
Income tax expense			(119,000	)			(177,000	)
Total comprehensive income		$	2,001,000			$	1,285,000

		Three Months Ended January 31,
		2006												2005
										Net												Net
		Net								Income				Net								Income
		Income				Shares				Per Share				Income				Shares				Per Share
Basic earnings per share		$	1,695,000				9,137,000			$	.19			$	856,000				9,056,000			$	.09
Effect of dilutive shares of common stock from stock options			—				338,000				(.01	)			—				193,000				—
Diluted earnings per share		$	1,695,000				9,475,000			$	.18			$	856,000				9,249,000			$	.09

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included in this Quarterly Report on Form 10-Q, other than statements of historical facts, address matters that the company reasonably expects, believes or anticipates will or may occur in the future. Forward-looking statements may relate to, among other things:

	•		the company’s future financial position, including working capital and anticipated cash flow;
	•		amounts and nature of future capital expenditures;
	•		operating costs and other expenses;
	•		wells to be drilled or reworked;
	•		oil and natural gas prices and demand;
	•		existing fields, wells and prospects;
	•		diversification of exploration;
	•		estimates of proved oil and natural gas reserves;
	•		reserve potential;
	•		development and drilling potential;
	•		expansion and other development trends in the oil and natural gas industry;
	•		the company’s business strategy;
	•		production of oil and natural gas;
	•		matters related to the Calliope Gas Recovery System;
	•		effects of federal, state and local regulation;
	•		insurance coverage;
	•		employee relations;
	•		investment strategy and risk; and
	•		expansion and growth of the company’s business and operations.

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Three Months Ended January 31,
		2006								2005								% Change
Product		Volume				Price				Volume				Price				Volume				Price
Gas (Mcf)			437,000			$	8.19	(1)			382,000			$	5.25	(2)			+14	%			+56	%
Oil (bbls)			9,500			$	56.94				9,000			$	42.67				+7	%			+33	%

(1)		Includes $0.61 Mcf hedging loss.
(2)		Includes $0.59 Mcf hedging loss.

ITEM 4. CONTROLS AND PROCEDURES

The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management’s control objectives.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the “Exchange Act”) as of January 31, 2006. On the basis of this review, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure. There were no changes in the company’s internal controls over financial reporting that occurred in the first fiscal quarter of 2006 that materially affected or were reasonably likely to materially affect, its internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     None.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in the company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2005.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

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ITEM 5. OTHER INFORMATION

     None.

ITEM 6. EXHIBITS

Exhibits are as follow:

	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)

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