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, 2009

 

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)

 

Delaware		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 has submitted electronically and posted on its corporate web site, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-Y during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes o 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 Act.)

 

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.

 

 

 

Table of Contents

 

CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

 

Quarterly Report on Form 10-Q For the Period Ended July 31, 2009

 

TABLE OF CONTENTS

 

		Page No.
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
Consolidated Balance Sheets
As of July 31, 2009 (Unaudited) and October 31, 2008		3
Consolidated Statements of Operations
For the Three and Nine Months Ended July 31, 2009 and 2008 (Unaudited)		4
Consolidated Statement of Stockholders’ Equity
For the Nine Months Ended July 31, 2009 (Unaudited)		5
Consolidated Statements of Cash Flows
For the Nine Months Ended July 31, 2009 and 2008 (Unaudited)		6
Notes to Consolidated Financial Statements (Unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	23
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
Signatures		25

 

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

 

		July 31,			October 31,
		2009			2008
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	13,490,000		$	22,332,000
Short-term investments		687,000			3,044,000
Receivables:
Accrued oil and gas sales		1,260,000			1,733,000
Trade		398,000			995,000
Derivative Assets		699,000			1,745,000
Other current assets		328,000			205,000
Total current assets		16,862,000			30,054,000
Long-term assets:
Oil and gas properties, at cost, using full cost method:
Unevaluated oil and gas properties		6,715,000			12,280,000
Evaluated oil and gas properties		74,651,000			59,730,000
Less: accumulated depreciation, depletion and amortization of oil and gas properties		(52,392,000		)	(25,554,000		)
Net oil and gas properties, at cost, using full cost method		28,974,000			46,456,000
Intangible Assets, net of accumulated amortization of $327,000 in 2009 and $595,000 in 2008		4,122,000			1,079,000
Compressor and tubular inventory to be used in development		1,798,000			2,592,000
Other, net		396,000			379,000
Total assets		$	52,152,000		$	80,560,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	569,000		$	3,857,000
Revenue distribution payable		643,000			982,000
Other accrued liabilities		633,000			931,000
Income taxes payable		171,000			124,000
Total current liabilities		2,016,000			5,894,000
Long Term Liabilities:
Deferred income taxes, net		1,958,000			11,117,000
Asset retirement obligation		1,423,000			1,338,000
Total liabilities		5,397,000			18,349,000
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, 10,660,000 shares issued		1,066,000			1,066,000
Capital in excess of par value		31,376,000			31,352,000
Treasury stock at cost, 361,594 shares in 2009 and 223,000 in 2008		(2,214,000		)	(982,000		)
Retained earnings		16,527,000			30,775,000
Total stockholders’ equity		46,755,000			62,211,000
Total liabilities and stockholders’ equity		$	52,152,000		$	80,560,000

 

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

 

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Table of Contents

 

CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

		Nine Months Ended						Three Months Ended
		July 31,						July 31,
		2009			2008			2009			2008
REVENUES:
Oil sales		$	4,142,000		$	4,320,000		$	2,024,000		$	1,649,000
Natural gas sales		3,156,000			10,001,000			813,000			3,997,000
		7,298,000			14,321,000			2,837,000			5,646,000
COSTS AND EXPENSES:
Oil and gas production		2,394,000			2,883,000			771,000			1,045,000
Depreciation, depletion and amortization		3,499,000			2,594,000			960,000			843,000
Write-down of oil and natural gas properties (Note 3) and impairment of long lived assets (Note 8)		24,653,000			—			—			—
General and administrative		1,953,000			1,034,000			564,000			337,000
		32,499,000			6,511,000			2,295,000			2,225,000
INCOME (LOSS) FROM OPERATIONS		(25,201,000		)	7,810,000			542,000			3,421,000
OTHER INCOME AND (EXPENSE)
Realized and unrealized gains (losses) from derivative contracts		1,911,000			(2,333,000		)	(16,000		)	1,139,000
Investment and other income (loss)		(66,000		)	118,000			54,000			47,000
		1,845,000			(2,215,000		)	38,000			1,186,000
INCOME (LOSS) BEFORE INCOME TAXES		(23,356,000		)	5,595,000			580,000			4,607,000
INCOME TAXES		9,108,000			(1,559,000		)	(227,000		)	(1,264,000		)
NET INCOME (LOSS)		$	(14,248,000	)	$	4,036,000		$	353 ,000		$	3,343,000
EARNINGS (LOSS) PER SHARE OF COMMON STOCK BASIC		$	(1.38	)	$	.43		$	0.03		$	.35
EARNINGS (LOSS) PER SHARE OF COMMON STOCK DILUTED		$	(1.38	)	$	.42		$	0.03		$	.34
Weighted average number of shares of Common Stock and dilutive securities:
Basic		10,341,000			9,430,000			10,305,000			9,690,000
Diluted		10,341,000			9,509,000			10,333,000			9,772,000

 

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

 

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CREDO PETROLEUM CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended July 31, 2009

(Unaudited)

 

							Capital In									Total
		Common Stock					Excess Of			Treasury			Retained			Stockholders’
Description		Shares		Amount			Par Value			Stock			Earnings			Equity
Balance October 31, 2008		10,660,000		$	1,066,000		$	31,352,000		$	(982,000	)	$	30,775,000		$	62,211,000
Comprehensive income (loss):
Net (loss)													(14,248,000		)	(14,248,000		)
Purchase of treasury stock										(1,232,000		)				(1,232,000		)
Compensation expense associated with unvested portion of previously granted stock options							24,000									24,000
Balance July 31, 2009		10,660,000		$	1,066,000		$	31,376,000		$	(2,214,000	)	$	16,527,000		$	46,755,000

 

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)

 

		Nine Months Ended
		July 31,
		2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(14,248,000	)	$	4,036,000
Adjustments to reconcile net income to net cash provided by operating activities:
Write-down of oil and natural gas properties and impairment of long lived assets		24,653,000			—
Depreciation, depletion and amortization		3,499,000			2,594,000
ARO liability accretion		85,000			38,000
Unrealized (gains) loss on derivative instruments		1,046,000			1,309,000
Deferred income taxes		(9,159,000		)	1,170,000
Loss on short term investments		65,000			67,000
Compensation expense related to stock options granted		24,000			44,000
Other		(5,000		)	—
Changes in operating assets and liabilities:
Proceeds from short-term investments		2,292,000			2,721,000
Accrued oil and gas sales		473,000			(1,776,000		)
Trade receivables		597,000			22,000
Other current assets		(123,000		)	(8,000		)
Accounts payable and accrued liabilities		(1,103,000		)	(589,000		)
Income taxes payable		47,000			38,000
NET CASH PROVIDED BY OPERATING ACTIVITIES		8,143,000			9,666,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties		(11,299,000		)	(8,414,000		)
Proceeds from sale of oil and gas properties		—			1,275,000
Changes in other long-term assets		(54,000		)	(1,494,000		)
Purchase intangible assets		(4,400,000		)	—
NET CASH USED IN INVESTING ACTIVITIES		(15,753,000		)	(8,633,000		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock		—			15,111,000
Purchase of treasury stock		(1,232,000		)	—
Proceeds from exercise of stock options (62,000 options in 2008)		—			366,000
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(1,232,000		)	15,477,000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(8,842,000		)	16,510,000
CASH AND CASH EQUIVALENTS:
Beginning of period		22,332,000			7,285,000
End of period		$	13,490,000		$	23,795,000
Additions to oil and gas properties in current liabilities		$	390,000		$	383,000

 

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)

July 31, 2009

 

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.  Management has evaluated events and transactions occurring after the balance sheet date through September 9, 2009, the date that the financial statements were issued.  For a more complete understanding of the company’s financial condition and accounting policies, 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, 2008.  The results for interim periods are not necessarily indicative of annual results.

 

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.

 

2.             CONCENTRATION OF CREDIT RISK

 

Credo’s accounts receivable are primarily from purchasers of the company’s oil and natural gas production and from other exploration and production companies which own joint working interests in the properties that the company operates.  This industry concentration could adversely impact the company’s overall credit risk, because the company’s customers and working interest owners may be similarly affected by changes in economic and financial market conditions, commodity prices, and other conditions.  Credo’s oil and gas production is sold to various purchasers in accordance with the company’s credit policies and procedures.  These policies and procedures take into account, among other things, the creditworthiness of potential purchasers and concentrations of credit risk.  For most joint working interest partners, the company has the right of offset against related oil and natural gas revenues.

 

3.             OIL AND NATURAL GAS PROPERTIES

 

Depreciation, depletion and amortization of oil and natural gas properties for the nine months ended July 31, 2009 and 2008 were $3,100,000 and $2,508,000 respectively, and were $838,000 and $811,000 for the three months ended July 31, 2009 and 2008, respectively.  The company uses the full cost method of accounting for costs related to its oil and natural gas properties.  Capitalized costs included in the full cost pool are depleted on an aggregate basis using the units-of-production method.  All costs incurred in the acquisition, exploration, and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes, and overhead related to exploration and development activities) and the fair value of estimated future costs of site restoration, dismantlement, and abandonment activities are capitalized.  Costs for unevaluated properties, which typically include lease rentals, geology and seismic costs, are capitalized but are excluded from the amortizable pool during the evaluation period. When determinations are made whether the property has proved recoverable reserves or not, or if there is an impairment, the costs are reclassified to the full cost pool.

 

7

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The capitalized costs in the full cost pool are subject to a quarterly ceiling test that limits such pooled costs to the aggregate of the present value of future net revenues attributable to proved oil and natural gas reserves discounted at 10 percent plus the lower of cost or market value of unproved properties less any associated tax effects.  The ceiling test is calculated using oil and natural gas prices in effect as of the balance sheet date.  If such capitalized costs exceed the ceiling, the company will record a write-down to the extent of such excess as a non-cash charge to earnings, unless the company considers price increases subsequent to the balance sheet date which may reduce or eliminate a write-down.  A write-down may not be reversed in future periods, even though higher oil and natural gas prices may subsequently increase the ceiling.

 

At July 31, 2009 the estimated present value of future net revenues from proved reserves, net of related income tax considerations, exceeded the capitalized costs of the company’s oil and natural gas properties.  Therefore, a ceiling test write-down was not required.

 

For the nine months ended July 31, 2009, the company has recorded ceiling test write-downs of $23,726,000.  Given the volatility of oil and natural gas prices, additional write-downs may be required in fiscal 2009.

 

Changes in oil and natural gas prices have historically had the most significant impact on the company’s ceiling test.  In general, the ceiling is lower when prices are lower.  Even though oil and natural gas prices can be highly volatile over weeks and even days, the ceiling calculation dictates that prices in effect as of the last day of the test period be used and held constant.  The resulting valuation is a snapshot as of that day and, thus, is generally not indicative of a true fair value that would be placed on the company’s reserves by the company or by an independent third party.  Therefore, the future net revenues associated with the estimated proved reserves are not based on the company’s assessment of future prices or costs, but rather are based on prices and costs in effect as of the end of the test period.

 

4.             STOCK-BASED COMPEN