UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
(Mark
One)
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended July 31, 2008
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the transition period from
to
Commission
File Number: 0-8877
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)
|
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
|
|
10,507,000
|
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.
2
Table
of Contents
CREDO
PETROLEUM CORPORATION AND SUBSIDIARIES
Quarterly
Report on Form 10-Q For the Period Ended July 31, 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.
3
Table
of Contents
PART I
- FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CREDO
PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
|
July 31,
|
|
October 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
(Restated)
|
|
|
ASSETS
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
23,795,000
|
|
$
|
7,285,000
|
|
|
Short-term
investments
|
|
3,595,000
|
|
6,383,000
|
|
|
Receivables:
|
|
|
|
|
|
|
Accrued
oil and gas sales
|
|
3,423,000
|
|
1,647,000
|
|
|
Trade
|
|
580,000
|
|
602,000
|
|
|
Derivative
Assets
|
|
—
|
|
443,000
|
|
|
Other
current assets
|
|
63,000
|
|
55,000
|
|
|
Total
current assets
|
|
31,456,000
|
|
16,415,000
|
|
|
|
|
|
|
|
|
|
Long-term
assets:
|
|
|
|
|
|
|
Oil
and gas properties, at cost, using full cost method:
|
|
|
|
|
|
|
Unevaluated
oil and gas properties
|
|
11,427,000
|
|
7,791,000
|
|
|
Evaluated
oil and gas properties
|
|
55,258,000
|
|
51,691,000
|
|
|
Less:
accumulated depreciation, depletion and amortization of oil and
gas properties
|
|
(24,616,000
|
)
|
(22,108,000
|
)
|
|
Net
oil and gas properties, at cost, using full cost method
|
|
42,069,000
|
|
37,374,000
|
|
|
Exclusive
license agreement, net of amortization of $553,000 in 2008 and
$501,000 in 2007
|
|
146,000
|
|
198,000
|
|
|
Compressor
and tubular inventory to be used in development
|
|
2,478,000
|
|
1,090,000
|
|
|
Other,
net
|
|
344,000
|
|
272,000
|
|
|
Total
assets
|
|
$
|
76,493,000
|
|
$
|
55,349,000
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
882,000
|
|
$
|
1,639,000
|
|
|
Revenue
distribution payable
|
|
1,493,000
|
|
979,000
|
|
|
Derivative
liabilities
|
|
673,000
|
|
—
|
|
|
Other
accrued liabilities
|
|
506,000
|
|
852,000
|
|
|
Income
taxes payable
|
|
472,000
|
|
434,000
|
|
|
Total
current liabilities
|
|
4,026,000
|
|
3,904,000
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities:
|
|
|
|
|
|
|
Deferred
income taxes, net
|
|
10,374,000
|
|
9,204,000
|
|
|
Derivative
liabilities due in more than one year
|
|
193,000
|
|
—
|
|
|
Exclusive
license obligation, less current obligations of $77,000 in 2008
and 2007
|
|
85,000
|
|
85,000
|
|
|
Asset
retirement obligation
|
|
1,118,000
|
|
1,016,000
|
|
|
Total
liabilities
|
|
15,796,000
|
|
14,209,000
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
Preferred
stock, no par value, 5,000,000 shares authorized, none issued
|
|
—
|
|
—
|
|
|
Common
stock, $.10 par value, 20,000,000 shares authorized, 10,660,000
shares issued in 2008 and 9,510,000 in 2007
|
|
1,066,000
|
|
951,000
|
|
|
Capital
in excess of par value
|
|
31,174,000
|
|
15,913,000
|
|
|
Treasury
stock at cost, 153,000 shares in 2008 and 215,000 in 2007
|
|
(361,000
|
)
|
(506,000
|
)
|
|
Retained
earnings
|
|
28,818,000
|
|
24,782,000
|
|
|
Total
stockholders’ equity
|
|
60,697,000
|
|
41,140,000
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
76,493,000
|
|
$
|
55,349,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
4
Table
of Contents
CREDO
PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Operations
(Unaudited)
|
|
|
Nine Months Ended
|
|
Three Months Ended
|
|
|
|
|
July 31,
|
|
July 31,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas sales
|
|
$
|
14,321,000
|
|
$
|
11,121,000
|
|
$
|
5,646,000
|
|
$
|
3,613,000
|
|
|
Investment
income and other
|
|
125,000
|
|
685,000
|
|
49,000
|
|
233,000
|
|
|
|
|
14,446,000
|
|
11,806,000
|
|
5,695,000
|
|
3,846,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas production
|
|
2,883,000
|
|
2,546,000
|
|
1,045,000
|
|
837,000
|
|
|
Depreciation,
depletion and amortization
|
|
2,594,000
|
|
2,782,000
|
|
843,000
|
|
883,000
|
|
|
General
and administrative
|
|
1,034,000
|
|
1,020,000
|
|
337,000
|
|
376,000
|
|
|
Interest
|
|
7,000
|
|
20,000
|
|
2,000
|
|
6,000
|
|
|
|
|
6,518,000
|
|
6,368,000
|
|
2,227,000
|
|
2,102,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
7,928,000
|
|
5,438,000
|
|
3,468,000
|
|
1,744,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN
(LOSS) ON DERIVATIVE CONTRACTS
|
|
|
|
|
|
|
|
|
|
|
Realized
gains (losses) from derivative contracts
|
|
(1,024,000
|
)
|
1,187,000
|
|
(1,876,000
|
)
|
201,000
|
|
|
Unrealized
gains (losses) from derivative contracts
|
|
(1,309,000
|
)
|
423,000
|
|
3,015,000
|
|
1,466,000
|
|
|
|
|
(2,333,000
|
)
|
1,610,000
|
|
1,139,000
|
|
1,667,000
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
5,595,000
|
|
7,048,000
|
|
4,607,000
|
|
3,411,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAXES
|
|
(1,559,000
|
)
|
(2,010,000
|
)
|
(1,264,000
|
)
|
(964,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
4,036,000
|
|
$
|
5,038,000
|
|
$
|
3,343,000
|
|
$
|
2,447,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE OF COMMON STOCK BASIC
|
|
$
|
.43
|
|
$
|
.54
|
|
$
|
.35
|
|
$
|
.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE OF COMMON STOCK DILUTED
|
|
$
|
.42
|
|
$
|
.54
|
|
$
|
.34
|
|
$
|
.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares of Common Stock and dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
9,430,000
|
|
9,268,000
|
|
9,690,000
|
|
9,282,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
9,509,000
|
|
9,402,000
|
|
9,772,000
|
|
9,406,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
5
Table
of Contents
CREDO
PETROLEUM CORPORATION AND SUBSIDIARIES
Statement
of Stockholders’ Equity and Comprehensive Income
(Unaudited)
For
the Nine Months Ended July 31, 2008
|
|
|
|
|
|
|
Capital In
|
|
|
|
|
|
Total
|
|
|
|
|
Common Stock
|
|
Excess Of
|
|
Treasury
|
|
Retained
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
Amount
|
|
Par Value
|
|
Stock
|
|
Earnings
|
|
Equity
|
|
|
Balance,
October 31, 2007 Restated
|
|
9,510,000
|
|
$
|
951,000
|
|
$
|
15,913,000
|
|
$
|
(506,000
|
)
|
$
|
24,782,000
|
|
$
|
41,140,000
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4,036,000
|
|
4,036,000
|
|
|
Sale
of Common Stock
|
|
1,150,000
|
|
115,000
|
|
14,996,000
|
|
—
|
|
—
|
|
15,111,000
|
|
|
Exercise
of common stock options
|
|
—
|
|
—
|
|
221,000
|
|
145,000
|
|
—
|
|
366,000
|
|
|
Compensation
expense associated with unvested portion of previously granted
stock options
|
|
—
|
|
—
|
|
44,000
|
|
—
|
|
—
|
|
44,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 31, 2008
|
|
10,660,000
|
|
$
|
1,066,000
|
|
$
|
31,174,000
|
|
$
|
(361,000
|
)
|
$
|
28,818,000
|
|
$
|
60,697,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
6
Table
of Contents
CREDO
PETROLEUM CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
|
Nine Months Ended
|
|
|
|
|
July 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
(Restated)
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,036,000
|
|
$
|
5,038,000
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
2,594,000
|
|
2,782,000
|
|
|
Unrealized
(gains) loss on derivative contracts
|
|
1,309,000
|
|
(423,000
|
)
|
|
Deferred
income taxes
|
|
1,170,000
|
|
1,566,000
|
|
|
Compensation
expense related to stock options granted
|
|
44,000
|
|
138,000
|
|
|
Other
|
|
38,000
|
|
62,000
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
(Gain)
loss on short term investments
|
|
67,000
|
|
—
|
|
|
Proceeds
from short-term investments
|
|
2,721,000
|
|
1,492,000
|
|
|
Purchase
of short-term investments
|
|
—
|
|
(2,169,000
|
)
|
|
Accrued
oil and gas sales
|
|
(1,776,000
|
)
|
180,000
|
|
|
Trade
receivables
|
|
22,000
|
|
371,000
|
|
|
Other
current assets
|
|
(8,000
|
)
|
(158,000
|
)
|
|
Accounts
payable and accrued liabilities
|
|
(589,000
|
)
|
(831,000
|
)
|
|
Income
taxes payable
|
|
38,000
|
|
226,000
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
9,666,000
|
|
8,274,000
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Additions
to oil and gas properties
|
|
(8,414,000
|
)
|
(6,794,000
|
)
|
|
Proceeds
from sale of oil and gas properties
|
|
1,275,000
|
|
171,000
|
|
|
Changes
in other long-term assets
|
|
(1,494,000
|
)
|
202,000
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
(8,633,000
|
)
|
(6,421,000
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Sale
of common stock
|
|
15,111,000
|
|
—
|
|
|
Proceeds
from exercise of stock options (62,000 options in 2008 and
67,000 options in 2007)
|
|
366,000
|
|
272,000
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
15,477,000
|
|
272,000
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
16,510,000
|
|
2,125,000
|
|
|
|
|
|
| |