Washington, D.C. 20549
Colorado 84-0772991
(State of Incorporation) (IRS Employer Identification)
1801 Broadway, Suite 900 80202
Denver, Colorado (Zip Code)
(Address of principal executive office)
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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
Indicate the number of shares outstanding of each of the issuer's classes of common stock, net of treasury stock, as of May 31, 2001: Common stock, $.10 par value - 3,121,000 Preferred stock, no par value - None issued
Consolidated Balance Sheets
As of April 30, 2001 (Unaudited) and October 31, 2000
Consolidated Statements of Earnings and Changes in Retained Earnings (Unaudited) For the Six and Three Month Periods Ended April 30, 2001 and 2000
Consolidated Statements of Cash Flows (Unaudited) For the Six Month Periods Ended April 30, 2001 and 2000
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on March 15, 2001. The following matters, as described more fully in the company's Proxy Statement, were approved by the shareholders:
(1) The following Class I nominees for director were elected:
For Withhold
--- --------
Oakley Hall 2,486,661 5,390
William F. Skewes 2,486,641 5,410
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(2) Hein + Associates LLP was approved as the independent auditors of the company for the fiscal year 2001. The shareholders voted 2,483,566 for and 2,070 against this appointment, with 6,415 votes abstaining.
There were 567,306 non-votes for each matter voted upon.
The financial information furnished in this Form 10-QSB reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position of the company for the periods presented.
CREDO PETROLEUM CORPORATION
Consolidated Balance Sheets
A S S E T S
April 30, October 31,
2001 2000
---------- ----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 558,000 $ 484,000
Short term investments 4,721,000 4,626,000
Receivables:
Trade 463,000 227,000
Accrued oil and gas sales 726,000 472,000
Other 193,000 108,000
----------- -----------
6,661,000 5,917,000
----------- -----------
OIL AND GAS PROPERTIES, net,
at cost, full cost method:
Unevaluated 2,010,000 1,601,000
Evaluated 5,868,000 5,134,000
----------- -----------
7,878,000 6,735,000
----------- -----------
EXCLUSIVE LICENSE AGREEMENT, net of
amortization of $47,000 in 2001 and
$12,000 in 2000 653,000 688,000
----------- -----------
OTHER, net 175,000 166,000
----------- -----------
$15,367,000 $13,506,000
=========== ===========
L I A B I L I T I E S A N D S T O C K H O L D E R S '
E Q U I T Y
CURRENT LIABILITIES:
Accounts payable $ 1,200,000 $ 935,000
Income taxes payable 281,000 276,000
----------- -----------
1,481,000 1,211,000
----------- -----------
DEFERRED INCOME TAXES 1,602,000 1,408,000
----------- -----------
EXCLUSIVE LICENSE OBLIGATION, less
current obligations of $40,000 500,000 500,000
----------- -----------
COMMITMENTS
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, without par value,
5,000,000 shares authorized,
none issued - -
Common stock, $.10 par value,
20,000,000 shares authorized,
3,678,000 shares issued 367,000 367,000
Capital in excess of par value 6,271,000 6,271,000
Retained earnings 6,057,000 4,925,000
Other comprehensive income 61,000 -
Treasury stock, at cost, 566,000
shares in 2001 and 679,000 shares
in 2000 (972,000) (1,176,000)
----------- -----------
11,784,000 10,387,000
----------- -----------
$15,367,000 $13,506,000
=========== ===========
See accompanying notes.
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CREDO PETROLEUM CORPORATION
Consolidated Statements of Earnings And Changes in
Retained Earnings - Unaudited
Six Months Six Months Quarter Quarter
Ended Ended Ended Ended
April 30, April 30, April 30, April 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
REVENUES:
Oil and gas sales $ 2,710,000 $ 1,316,000 $ 1,334,000 $ 680,000
Operating 223,000 212,000 114,000 102,000
Investment income
and other 109,000 345,000 17,000 92,000
Non-recurring
litigation
settlement - 345,000 - -
----------- ----------- ----------- ----------
3,042,000 2,218,000 1,465,000 874,000
----------- ----------- ----------- ----------
COSTS AND EXPENSES:
Oil and gas
production 599,000 434,000 288,000 180,000
Depreciation,
depletion and
amortization 364,000 305,000 181,000 156,000
General and
administrative 462,000 426,000 239,000 209,000
----------- ----------- ----------- ----------
1,425,000 1,165,000 708,000 545,000
----------- ----------- ----------- ----------
INCOME BEFORE
INCOME TAXES 1,617,000 1,053,000 757,000 329,000
INCOME TAXES (485,000) (337,000) (227,000) (105,000)
----------- ----------- ----------- ----------
NET INCOME 1,132,000 716,000 530,000 224,000
RETAINED EARNINGS,
BEGINNING OF PERIOD 4,925,000 3,578,000 5,527,000 4,070,000
----------- ----------- ----------- ----------
RETAINED EARNINGS,
END OF PERIOD $ 6,057,000 $ 4,294,000 $ 6,057,000 $ 4,294,000
=========== =========== =========== ===========
BASIC NET INCOME
PER SHARE $ .37 $ .24 $ .17 $ .08
====== ====== ====== ======
DILUTED NET INCOME
PER SHARE $ .35 $ .23 $ .16 $ .07
====== ====== ====== ======
See accompanying notes.
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CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Six Months Ended
April 30,
-------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net income $ 1,132,000 $ 716,000
Noncash expenses included in
net income:
Depreciation, depletion
and amortization 364,000 305,000
Deferred income taxes 194,000 238,000
Changes in operating assets
and liabilities:
Proceeds from short term
investments 746,000 948,000
Purchase of short term
investments (842,000) (2,026,000)
Trade receivables (236,000) 58,000
Accrued oil and gas sales (254,000) 1,000
Other (85,000) 14,000
Accounts payable 265,000 28,000
Income tax payable 5,000 (79,000)
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,289,000 203,000
----------- -----------
INVESTING ACTIVITIES:
Oil and gas properties, net (1,445,000) (19,000)
Changes in long-term assets 26,000 (63,000)
----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (1,419,000) (82,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of
stock options 209,000 -
Purchase of treasury stock (5,000) -
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 204,000 -
----------- -----------
INCREASE IN CASH AND
CASH EQUIVALENTS 74,000 121,000
CASH AND CASH EQUIVALENTS:
Beginning of Period 484,000 184,000
----------- -----------
End of Period $ 558,000 $ 305,000
=========== ===========
See accompanying notes.
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and Results of Operations April
30, 2001
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital and cash flow represent a significant capital resource and source of liquidity. At April 30, 2001, working capital was $5,180,000, compared to $4,706,000 at October 31, 2000. Cash flow from operating activities before working capital changes totaled $1,690,000 for the six months, up 34% from the same period last year. Cash flow was used to fund net oil and gas property expenditures totaling $1,445,000.
Existing working capital and anticipated cash flow are expected to be sufficient to fund fiscal 2001 operations. However, if the company were to make one or more major acquisition during the coming year, bank borrowing, issuance of additional stock, or other forms of debt financing would be considered. Because earnings are anticipated to be reinvested in operations, cash dividends are not expected to be paid in the foreseeable future.
Pending deployment into oil and gas assets, cash is primarily invested with money managers who specialize in short-term timing of mutual funds. The average return on the company's investments was 3% for the first half of fiscal 2001 and 9% in the same period last year. The first half 2001 decline in investment returns primarily reflects a volatile and down trending stock market during the first half of fiscal 2001 which limit investment opportunities for the market timers which manage the bulk of the company's investments.
Commitments for future capital expenditures were approximately $400,000 at April 30, 2001. The timing of most capital expenditures for exploration and development is relatively discretionary. Therefore, the company can plan expenditures to coincide with available funds in order to minimize business risks.
PRODUCT PRICES, PRODUCTION AND OPERATIONS
Numerous uncertainties exist in the oil and gas exploration and production industry which are beyond the company's ability to predict with reasonable accuracy.
Gas price decontrol, the advent of an active spot market for natural gas, and increased energy commodity market trading have resulted in gas prices received by the company being subject to significant monthly fluctuations. Gas prices generally accelerate in peak demand periods such as the winter months and subside during lower demand periods.
Uncertainties also exist with respect to the supply of oil available to world markets. OPEC and other major foreign producers exercise considerable influence over the worldwide oil supply which in turn affects prices for petroleum products.
Although product prices are key to the company's ability to operate profitably and to budget capital expenditures, they are beyond the company's control and are difficult to predict. The company periodically hedges the price of its oil and gas production when the potential for significant downward price movement is anticipated. Hedging transactions take the form of forward, or "short", selling in the NYMEX futures market, and are closed by purchasing offsetting "long" positions. Such hedges do not exceed anticipated 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 and gains or losses recognized for financial reporting purposes as related production occurs. However, hedges may be closed earlier if the anticipated downward price movement occurs or if the company believes that the potential for such movement has abated. All other futures transactions are accounted for as speculative transactions and gains and losses are immediately recognized.
At April 30, 2001, open hedge positions totaled 150,000 Mcfg (thousand cubic feet of gas) at an average price of $5.38 per Mcf and represented approximately 88% of expected natural gas production for the months of June through August 2001. The company deferred a realized net gain of $21,000 for the May hedge which was closed prior to April 30, 2001. Subsequent to April 30, 2001, the June hedge (60,000 Mcf) was closed and an $83,000 gain was realized. The company currently has open hedge positions totaling 180,000 Mcfg covering the months of July, August and September at an average price of $4.55 per Mcf. This hedge represents approximately 85% of the company's estimated gas production for those months.
The company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" on November 1, 2000. There were no derivative instruments outstanding on November 1, 2000. The company has determined that its derivative instruments meet the criteria for cash flow hedge accounting. The company recognizes all derivatives on the balance sheet at fair value at the end of each period. Changes in the fair value of a cash flow hedge are recorded in Other Comprehensive Income on the Consolidated Balance Sheets and then are reclassified into the Consolidated Statement of Earnings as the underlying hedged item affects earnings. Amounts reclassified into earnings related to natural gas hedges are included in oil and gas sales. During the first half of fiscal 2001, unrealized net gains of approximately $88,000 ($61,000 net of tax) related to natural gas hedging transactions were recorded in Other Comprehensive Income.
The following table sets forth the components of Comprehensive Income for each of the periods ended April 30:
Six Months Ended Three Months Ended
April 30, April 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net Income $ 1,119,000 $ 716,000 $ 517,000 $ 224,000
Deferred gain on
derivatives designated
as cash flow hedges 61,000 - 1,000 -
----------- ----------- ----------- -----------
Comprehensive income $ 1,180,000 $ 716,000 $ 518,000 $ 224,000
=========== =========== =========== ===========
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Oil and gas sales volume and price comparisons for the indicated periods
are set forth below.
Six Months Six Months Percent Percent
Ended April 30, 2001 Ended April 30, 2000 Volume Price
-------------------- --------------------
Product Volume Price Volume Price Change Change
------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 345,900 $ 5.99(1) 345,400 $ 2.39 0% +151%
Oil (bbls) 22,800 $28.02 19,100 $25.66 + 19% + 9%
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Three Months Three Months Percent Percent
Ended April 30, 2001 Ended April 30, 2000 Volume Price
-------------------- --------------------
Product Volume Price Volume Price Change Change
------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 181,300 $ 5.80(2) 170,700 $ 2.46 + 6% +136%
Oil (bbls) 10,900 $26.06 9,600 $27.04 + 14% - 4%
(1) Includes $.19 hedging gain.
(2) Includes $.37 hedging gain.
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Gas production remained flat between the six month periods as new production coming on-stream offset production lost due to the sale of properties and the rapid production decline on one of the company's largest producing wells. For the three month periods, gas production increased 6% indicating that such new production has begun to more than offset the lost production.
Oil production increased 19% due to continued success at the S. E. Hewitt waterflood project and initial production from a new discovery in Beaver County, Oklahoma. The company owns a 20% interest in the S. E. Hewitt waterflood which continues to outperform initial expectations. In Beaver County, Oklahoma, the company participated for 15% in drilling the Wilkerson #1-1 well. That 7,700 foot well resulted in a new zone oil discovery in the Lower Chester sand. The combined sands were completed flowing at a daily rate of approximately 500 barrels of oil and 200 Mcf gas. The Wilkerson #1 well also encountered several up-hole gas zones in the Morrow and Upper Chester formations which wireline logs indicate are productive. Due to the excellent oil production from the Lower Chester sands, it is anticipated the gas zones will be developed by a "twin" well. CREDO owns 15% of the spacing unit.
The company's patented Calliope technology has continued to make a significant impact on production and revenues. Calliope wells contributed 23% of first half gas production compared to 17% in the same period last year. This technology significantly increases the amount of gas that can be recovered from many low pressure gas reservoirs. During fiscal 2001, for the first time, the company successfully installed Calliope systems inside standard 2-7/8-inch tubing. Installations were completed on two wells at depths of 12,600 and 12,800 feet. Both wells had ceased producing and were scheduled to be plugged and abandoned. Calliope immediately restored both wells to commercial production rates between 185 to 200 Mcfgd (thousand cubic feet of gas per day) per well.
The company estimates gross additional reserves recoverable from the two wells using Calliope technology to be 1.2 to 2.0 Bcfg (billion cubic feet of gas). CREDO owns a 75% working interest (60% net revenue interest) in both wells and its share of the estimated Calliope reserves is 720 million to 1.2 billion cubic feet of gas having a gross value (at $4.00 per Mcf) of $2,900,000 to $4,800,000. The company's share of costs to install Calliope on the two wells was approximately $380,000, yielding a finding cost of $0.32 to $0.54 per Mcfg.
Subsequent to second quarter-end, the recently drilled 7,800-foot Bill-Judy Brown #1-6 well was completed in the Morrow formation and was tested at an absolute open flow rate of approximately 3.3 million cubic feet of gas per day (MMcfgd) and three to four barrels of oil. The well is currently producing on a 20/64-inch choke at a daily rate of 1.56 MMcfg and eight barrels of oil. CREDO owns a 60% working interest and a 49% net revenue interest in the well, and is the operator. The Bill Judy Brown well was drilled as an offset to the Wilkerson #1 well discussed above.
Also subsequent to second quarter-end, the company drilled the 8,800-foot
Thurmond-State #1-36 well in Ellis County, Oklahoma. The well has been completed
in two separate Morrow formation sands and was tested at an absolute open flow
rate of approximately 3.8 MMcfgd and 10 barrels of oil. The well is currently
producing on a 16/64-inch choke at a daily rate of
1.5 MMcfg and 7 barrels of oil. CREDO owns a 17.5% working interest in the well
and is the operator.
These new wells are expected to add significantly to the company's gas production for the balance of fiscal 2001.
Production from 22 wells drilled on the company's 10% owned Recluse coal bed methane property located in north-central Wyoming awaits completion of a pipeline into the property. The operator expects first production in July of this year. The company owns interests in 20,000 gross and 4,000 net acres in Wyoming and Utah which are prospective for coal bed methane development.
The company is currently committed to participate with interests ranging from 7% to 40% in drilling five wells as drilling rigs become available. All of these projects are located in the company's core drilling areas in northwestern Oklahoma.
INCOME TAXES
The company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), which requires the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate in effect at that time.
The total future deferred income tax liability under SFAS 109 is extremely complicated for any oil company to estimate due in part to the long-lived nature of depleting oil and gas reserves and variables such as product prices. Accordingly, the liability is subject to continual recalculation, revision of the numerous estimates required, and may change significantly in the event of such things as major acquisitions, divestitures, product price changes, changes in reserve estimates, changes in reserve lives, and changes in tax rates or tax laws.
RESULTS OF OPERATIONS
Six Months Ended April 30, 2001 Compared to Six Months Ended April 30, 2000
For the six months ended April 30, 2001, net income from continuing operations (excluding a one time litigation settlement last year) increased 135% to $1,132,000 compared to $481,000 last year. Including the prior year litigation settlement, net income increased 58% to $1,132,000 compared to $716,000 for the same period last year.
Total revenues increased 37% to $3,042,000 in the first half of 2001 compared to $2,218,000 last year. Oil and gas sales increased $1,394,000, or 106%, to $2,710,000. Refer to the table and discussion on pages 8 and 9 for details of oil and gas prices and volumes for the applicable periods. Total gas price realizations rose 151% to $5.99 per Mcf compared to $2.39 last year. Hedging transactions increased first half 2001 price realizations by $.19 per Mcf, or 3%. There were no hedging transactions during the first half of fiscal 2000. Net wellhead prices for gas increased 143% to $5.80 per Mcf compared to $2.39 last year. Net wellhead oil price realizations increased 9% to $28.02 per barrel compared to $25.66 last year. The net effect of these price changes, including hedging transactions, was to increase oil and gas sales $1,297,000. Gas volumes remained comparable and oil volumes increased 19%. The net effect of volume changes was to increase oil and gas sales by $97,000. Operating income increased $11,000, or 5%, due to drilling overhead income. As discussed on page 6, investment income fell 68% to $109,000 compared to $345,000 last year due primarily to a volatile and down trending stock market during the first half of fiscal 2001 which limited investment opportunities for the market timers which manage the bulk of the company's investments.
Non-recurring litigation settlement income of $345,000 ($235,000 after taxes) in fiscal 2000 resulted from a one time partial recovery of investment losses incurred by the company in 1990 by settlement of a lawsuit.
Total costs and expenses rose 22% to $1,425,000 in the first half of fiscal 2001 compared to $1,165,000 last year. General and administrative expenses rose 8% due to inflationary pressures and the timing of certain expenditures. Depreciation, depletion and amortization increased 19% due to increases in oil production, depreciation of additional business equipment, and amortization of the cost of an exclusive license agreement which was not effective in the prior year period. The 38% increase in oil and gas production expenses primarily reflects increased production taxes on higher oil and gas sales revenue. Income taxes were provided at 30% in fiscal 2001 and 32% in the prior fiscal period. The tax rate reduction is based primarily on actual tax rates for the prior fiscal year tax return being lower than previously estimated.
Quarter Ended April 30, 2001 Compared to Quarter Ended April 30, 2000
Net income for the quarter ended April 30, 2001 increased 137% to $530,000 compared to $224,000 for the same quarter last year.
Total revenues increased 68% to $1,465,000 in the second quarter of 2001 compared to $874,000 for the same quarter last year. Oil and gas sales increased 96% to $1,334,000 compared to $680,000 last year. Refer to the table and discussion on pages 8 and 9 for details of oil and gas prices and volumes for the applicable periods. Total gas price realizations rose 136% to $5.80 per Mcf compared to $2.46 last year. Hedging transactions increased second quarter price realizations $.37 per Mcf, or 7%. There were no hedging transactions during the second quarter of fiscal 2000. Net wellhead prices for gas increased 121% to $5.43 per Mcf compared to $2.46 last year. Net wellhead oil price realizations fell 4% to $26.06 per barrel compared to $27.04 last year. The net effect of these price changes and hedging transactions was to increase oil and gas sales $565,000. Gas volumes increased 6% and oil volumes increased 14%. The net effect of volume changes was to increase oil and gas sales $89,000. Operating income increased $12,000, or 12% due to drilling overhead income. Investment income fell 82% to $17,000 compared to $92,000 last year due primarily to a volatile and down trending stock market during the first half of fiscal 2001 which limited investment opportunities for the market timers which manage the bulk of the company's investments.
Total costs and expenses increased 30% to $708,000 in the second quarter of 2001 compared to $545,000 last year. General and administrative expenses rose 14% due to inflationary pressures and the timing of certain expenditures. Depreciation, depletion and amortization increased 16% primarily due to increases in oil and gas production, depreciation of additional business equipment, and amortization of the cost of an exclusive license agreement which was not effective in the prior year quarter. The 60% increase in oil and gas production expenses primarily reflects increased production taxes on higher oil and gas sales revenue. Income taxes were provided at 30% in fiscal 2001 and 32% in fiscal 2000. The tax rate reduction is based primarily on actual tax rates for the prior fiscal year tax return being lower than previously estimated.
FORWARD-LOOKING STATEMENTS
Certain information included in this quarterly report and other materials filed by the company with the Commission contain forward-looking statements relating to the company's operations and the oil and gas industry. Such forward-looking statements are based on management's current projections and estimates and are identified by words such as "expects," "intends," "plans," "projects," "anticipates," "believes," "estimates" and similar words. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from what is expressed or forecasted in such forward- looking statements. Among many factors that could cause actual results to differ materially are: (i) crude oil and natural gas price fluctuations, (ii) the company's ability to acquire oil and gas properties that meet its objectives and to identify prospects for drilling, and (iii) potential delays or failure to achieve expected production from existing and future exploration and development projects. In addition, such forward-looking statements may be affected by general domestic and international economic and political conditions.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: June 12, 2001 By: /s/ James T. Huffman
--------------------------------
James T. Huffman
President and
Chief Executive Officer
By: /s/ John A. Alsko
--------------------------------
John A. Alsko
Vice President and
Chief Financial Officer
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©2000-2004 CREDO Petroleum Corporation. All rights reserved. |
