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, 2003: Common stock, $.10 par value - 3,945,000 Preferred stock, no par value - None issued
Consolidated Balance Sheets Consolidated Statements of Earnings and Changes in Retained Earnings (Unaudited) Consolidated Statements of Cash Flows (Unaudited) For the Six Month Periods
Ended April 30, 2003 and 2002
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's annual meeting of shareholders was held on March 13, 2003. The
following matters, as described more fully in the company's Proxy Statement,
were approved by the shareholders:
(1) The following Class II nominees for director were elected: (2) Hein + Associates LLP was approved as the independent auditors of the
Company for the fiscal year 2003. The shareholders voted 2,776,973 for and 2,560
against this appointment, with 16,049 abstentions.
There were 484,542 non-votes for each matter voted upon.
(a) Exhibits 99.1 Certification by Chief Executive Officer under 99.2 Certification by Chief Financial Officer under (b) Reports on Form 8-K
No current reports on Form 8-K were filed during the reporting quarter.
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-QSB 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 accruals) considered necessary for a fair presentation of the
company's results for the periods presented. Certain reclassifications have been
made to prior period amounts with no effect on net income. These consolidated
financial statements should be read in conjunction with the company's Form
10-KSB for the fiscal year ended October 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital and cash flow represent a significant capital
resource and source of liquidity. At April 30, 2003, working capital was
$6,258,000, compared to $6,630,000 at October 31, 2002. Cash flow from operating
activities before working capital changes totaled $2,226,000 for the six months,
compared to $1,190,000 from the same period last year.
Existing working capital and anticipated cash flow are expected to be
sufficient to fund fiscal 2003 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 portfolio was 4% for the first half of fiscal 2003
compared to 1% in the same period last year. Relatively low investment returns
in 2002 and 2003 compared to prior years are primarily due to market conditions
that have limited investment opportunities for the market timers which manage
the bulk of the company's investments. Management considers the potential for
adverse impact from major unexpected events, such as September 11, 2001, to be
the major significant risk to its investment strategies.
Commitments for future capital expenditures were not material at April 30,
2003. 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,
changes in supply and demand for natural gas, and weather patterns cause prices
received by the company to be subject to significant fluctuations. Gas prices
generally accelerate in peak demand periods such as the winter months and
subside during lower demand periods.
Significant world events and OPEC's production and pricing policies influence
OPEC and worldwide supply and demand and prices for crude oil and 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 natural 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, which are
accounted for as cash flow 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. Such hedges may also be reinstated if
the potential for such movement re-occurs or if management concludes that it has
misjudged information used to make its decisions. All other futures transactions
are accounted for as speculative transactions and gains and losses are
immediately recognized.
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. At April 30,
2003, there were no open natural gas hedge positions.
Subsequent to April 30, 2003, the company hedged approximately 50% of its
expected production, or 250 MMcf, for the months of July through November 2003
at an average NYMEX price of $6.39 per Mcf. The company expects average gas
prices in its market areas to be 15% to 17% below NYMEX prices due to basis
differentials and transportation costs.
The following table sets forth the components of Comprehensive Income for
each of the periods presented:
Oil and gas sales volume and price comparisons for the indicated periods are
set forth below.
Anadarko Shelf Drilling Program. The company's drilling program centers on
its 13,000 gross acre Sand Creek Prospect and its 3,000 gross acre Two Springs
Prospect, both located in Harper and Ellis Counties, Oklahoma. Drilling targets
Morrow and Chester zones from 7,400 to 7,900 feet. CREDO has recently expanded
its acreage ownership in the area by participating in satellite projects
operated by other companies.
In total, 19 wells have been drilled on the two prospects in the last few
years, of which 15 were either completed as producers or are awaiting
completion. Currently, one well is drilling and 10 wells are projected for
drilling. Three of those wells will be drilled in June and July. Both prospects
have ample room for additional exploration.
On the east side of the Sand Creek Prospect, the company participated for a
24% interest in the Easterwood #11-23. The 7,400-foot well encountered 12 feet
of Morrow sand and five feet of Chester limestone, both of which produced gas
during completion testing. The well is currently awaiting pipeline connection
and fracture stimulation.
Approximately one mile south of the Easterwood #11-23, the company
participated in the 7,450-foot Easterwood #6-26 which encountered nine feet of
Morrow sand but tested water. The well has been plugged. One mile to the south,
the company drilled its 7,550-foot Arley #1-35 which was also plugged.
Three miles south of the Arley, the company is participating for a 37.5%
interest in the Deanna #1-15, which is currently drilling. This well targets
Morrow sand at 7,700 feet. The Deanna is the first well on the southeast corner
of the Sand Creek Prospect where the company also owns significant interests in
several offsetting sections.
On the west side of the Sand Creek Prospect, the company has participated
with a 12% interest in three recent wells. These wells are currently classified
as "tight holes", meaning that for proprietary business reasons the
company is not releasing drilling information.
Fifteen miles south of the Sand Creek Prospect, the company has drilled its
third well on the Thurmond Prospect. The Thurmond-State #2-36 encountered 11
feet of Morrow sand, and is currently producing 175 Mcfg (thousand cubic feet of
gas) per day. CREDO owns 37.5% and is the operator.
Three new wells will be drilled beginning in the last week of June. The
Gillenwaters #1-34 will be drilled on the Two Springs Prospect as a north
step-out to the previously reported Wills #1-3. The well will test Morrow and
Chester zones at 7,200 feet. CREDO owns a 28% interest and is the operator.
On the Sand Creek Prospect, the Derby #1-22 will test Morrow sand at 7,600
feet. This step-out well will be located about one mile west of the recently
completed Easterwood #11-23. CREDO is the operator and owns 36%. The Glendena
#2-5 will be drilled about one-half mile south of the Glendena #1-5, which has
been a prolific producer for the area. The Glendena #2-5 will test Morrow sand
at 7,600 feet. The company owns 40% and is the operator.
In Woods County, Oklahoma, successful drilling is continuing in the South
Fork Field. To date, the company has joined for 7% in drilling 13 development
wells in the field. The most recent well, the Erickson #3-30, encountered 15
feet of Mississippi dolomite at 5,200 feet which electric logs indicate should
be productive. The well is currently awaiting completion.
In Beaver County, Oklahoma, development drilling is continuing on the
company's Traxler property. The previously reported Wilkerson #2-1 encountered
36 feet of Chester limestone at 8,100 feet. For April, daily production averaged
2.3 MMcfg, nine barrels of condensate and minimal water. CREDO owns 15%.
About three-quarters of a mile southeast of the Wilkerson well, the company
is preparing to drill the Ronnie #1-6 to test the Chester formation at 8,100
feet. CREDO owns 45% and will be the operator.
The company recently installed Calliope on four of the nine candidate wells
acquired late last year. Previous owners gave up on the wells and all but one
had been completely dead for at least a year. Management believes that all of
the installations were successful in adding significant, long-lived reserves and
immediately restoring production rates to levels that will provide excellent
rates of return on investment.
Calliope's operating depth range was substantially extended with a successful
installation on the 18,400-foot Green Estate well located in Beckham County,
Oklahoma. Calliope's previous record depth was 12,500 feet. The Green Estate
well had produced 28.8 Bcfg and, at the time Calliope was installed, had been
dead for three years. Testing and well data indicated that significant reservoir
damage was caused by a workover performed by the previous owner. Although the
company expected Calliope production to be compromised, it proceeded with the
installation in anticipation of strong gas prices and the well's high reserve
potential.
Calliope immediately restored daily production to over 300 Mcfg (thousand
cubic feet of gas) and five to seven barrels of condensate and water.
Installation cost was approximately $400,000. Reservoir pressure indicates that
up to 2.0 Bcfg (billion cubic feet of gas) of remaining gas reserves could be
recovered by Calliope (8/8ths basis). CREDO owns a 65% working interest in the
well and is the operator.
Calliope was also recently installed on the 12,300-foot Meacham well located
in Custer County, Oklahoma. The well had produced 20.0 Bcfg and 322,000 barrels
of oil and was flowing at marginal rates before the installation. During the
installation a perforating gun was lost in the hole resulting in a compromised
installation. Nevertheless, Calliope increased daily production to 150 Mcfg and
two barrels of condensate and water. The cost to install Calliope was
approximately $350,000 and it is expected to add about 1.0 Bcfg to gross
recoverable reserves. CREDO owns an approximate 80% working interest and is the
operator.
In mid-February Calliope was installed on the 11,100-foot Fee well located in
Hemphill County, Texas. The well had produced 8.0 Bcfg and had been dead for
about a year. Calliope immediately restored daily production to 250 Mcfg and six
barrels of condensate and it has since remained at that level. The installation
cost about $150,000 and the company estimates that Calliope added approximately
500 MMcfg (million cubic feet of gas) to gross recoverable reserves. CREDO owns
an approximate 78% working interest and is the operator.
In early March Calliope was installed on the 12,400-foot Horn well located in
Grady County, Oklahoma. The well had produced 12.9 Bcfg and had been dead for
three years. Prior to being shut-in, the well apparently experienced a packer
leak and soap was used to stimulate production, both of which compromised the
permeability of the reservoir. Nevertheless, Calliope immediately restored daily
production to approximately 180 Mcfg and it has since remained at that level.
The installation cost about $280,000. Reservoir pressure indicates that up to
1.0 Bcfg of remaining reserves could be recovered by Calliope (8/8ths basis).
CREDO owns a 78% working interest in the well and is the operator.
Calliope has been more flexible than Management originally expected and it
has proven it will work successfully over a broad range of wellbore conditions,
including wells with packers and tubing diameters of less than 2.0-inches. The
Green Estate application extended Calliope's operating depth range by almost 50%
and established its viability in a rigorous deep well application. This is a
very important accomplishment because installation and operating complexity
increases exponentially as we move into significantly deeper reservoirs.
The animation portion of the Calliope multimedia project is complete, and the
project is currently in the final production stage.
On March 19, 2003, the company declared a 20% stock dividend to shareholders
of record on April 2, 2003. On April 23, 2003, the company issued 656,000 shares
of common stock in conjunction with this dividend. Accordingly, the fair value
(based on the quoted market price as adjusted) of the additional shares issued
of $6,277,000 was charged to retained earnings and credited to common stock and
capital in excess of par value. Cash payments were made to shareholders in lieu
of fractional shares. The basic and diluted weighted average number of shares
outstanding and net income per share information for all prior reporting periods
have been restated to reflect the effects of the stock dividend.
CHANGE IN ACCOUNTING PRINCIPLE
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" that requires entities
to record the fair value of a liability for an asset retirement obligation in
the period in which it is incurred and a corresponding increase in the carrying
amount of the related long-lived asset. This statement is effective for fiscal
years beginning after June 15, 2002. The company adopted SFAS No. 143 on
November 1, 2002 and recorded an asset and related liability of $179,000 (using
a 5% discount rate) and a cumulative effect on change in accounting principle on
prior years of $72,000 (net of taxes of $28,000). For the three and six month
periods ended April 30, 2003, the company recognized $2,000 and $4,000,
respectively, of accretion expense on the liability and a decrease of $12,000
and $17,000, respectively, in depletion expense as a result of adopting SFAS No.
143.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of SFAS No. 123." This statement provides alternative methods
of transition for a voluntary change in the method of accounting for stock-based
employee compensation to the fair value method. The statement also amends the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under SFAS No. 148, annual and interim financial statements
are required to have prominent disclosures about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
This statement is effective for fiscal years ending after December 15, 2002.
This statement did not have any impact on the consolidated financial statements
as the company adopted the disclosure only provisions of SFAS No. 123. Under
current accounting rules the company elected to account for its stock-based
employee compensation under the intrinsic value method established by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
If compensation expense had been determined in accordance with the provisions
of FASB No. 123, the company's net income and per share amounts would have been
reported as follows:
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, 2003 Compared to Six Months Ended April 30, 2002
For the six months ended April 30, 2003, net income rose 121% to a record
$1,187,000 compared to $537,000 last year. Higher net income resulted primarily
from an increase in product prices.
Total revenues rose 39% to $3,475,000 compared to $2,493,000 last year. Oil
and gas sales rose 39% to $3,034,000 compared to $2,177,000 last year. Refer to
the table on page 10 for details of oil and gas prices and volumes for the
applicable periods. Net wellhead natural gas prices rose 95% to $4.73 per Mcf
compared to $2.42 last year. Hedging transactions reduced first half 2003 price
realizations by $.69 per Mcf, or 15%, compared to an increase of $.54 per Mcf,
or 22%, last year. As a result, total natural gas price realizations were $4.04
per Mcf compared to $2.96 last year. Net wellhead prices for oil rose 48% to
$28.27 per barrel compared to $19.06 last year. The net effect of these price
changes and hedging transactions was to increase oil and gas sales $833,000. The
net effect of volume changes was minimal. Operating income increased 4% due to
drilling overhead income that was partially offset by the sale of several
marginal operated properties. Investment income and other rose 157% to $190,000
compared to $74,000 last year due to improved performance from market timers who
manage the bulk of the company's investments.
Total costs and expenses increased 12% to $1,926,000 in the first half of
fiscal 2003 compared to $1,726,000 last year. Oil and gas production expenses
rose 5%, or $34,000, due primarily to the additional operating costs associated
with production from new wells and Calliope. Depreciation, depletion and
amortization increased 8% primarily due to an increase in the amortizable full
cost pool base. General and administrative expenses increased 25% due to
increases in salaries and wages for accrued bonuses and consulting fees related
to the accounting software conversion as well as inflationary pressures.
Interest expense primarily relates to the accrual of interest on the exclusive
license agreement obligation. Income taxes were provided at 28% in the current
period and 30% last year.
For the quarter ended April 30, 2003, net income rose 53% to $502,000
compared to $327,000 for the same quarter last year. Higher net income resulted
primarily from an increase in product prices.
Total revenues rose 28% to $1,684,000 compared to $1,312,000 for the same
quarter last year. Refer to the table on page 10 for details of oil and gas
prices and volumes for the applicable periods. Net wellhead natural gas prices
rose 124% to $5.49 per Mcf compared to $2.45 last year. Hedging transactions
reduced second quarter price realizations $1.72 per Mcf, or 31%, compared to an
increase of $.45, or 18%, last year. As a result, total natural gas price
realizations were $3.77 per Mcf compared to $2.90 last year. Net wellhead prices
for oil rose 45% to $30.55 per barrel compared to $21.06 last year. The net
effect of these price changes and hedging transactions was to increase oil and
gas sales $364,000. The effect of volume changes was minimal. Operating income
increased 8% due to drilling overhead income that was partially offset by the
sale of several marginally operated properties. Investment income and other rose
75% to $114,000 compared to $65,000 last year due to improved performance from
market timers who manage the bulk of the company's investments.
Total costs and expenses increased 17% to $987,000 in the second quarter of
2003 compared to $845,000 last year. Oil and gas production expenses rose 22%,
or $67,000, due primarily to the additional operating costs associated with
production from new wells and Calliope installations. Depreciation, depletion
and amortization fell 3% due primarily due to a decrease in production volumes
between the periods. General and administrative expenses increased $86,000, or
36%, primarily due to increases in salaries and wages for accrued bonuses and
consulting fees related to the conversion of accounting software as well as
inflationary pressures. Interest expense relates to the accrual of interest on
the exclusive license agreement obligation. Income taxes were provided at 28% in
the current quarter and 30% last year.
CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the company carried
out an evaluation, under the supervision and with the participation of the
company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-14(c). "Disclosure
controls and procedures" are controls and procedures that are designed to
ensure that information required to be disclosed by the company in reports filed
or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Based upon that evaluation, the company's Chief
Executive Officer and Chief Financial Officer concluded that the company's
disclosure controls and procedures are effective for these purposes as of the
date of the evaluation.
There have been no significant changes in the company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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) natural gas and crude oil
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.
I, James T. Huffman, Chief Executive Officer of CREDO Petroleum Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of CREDO Petroleum
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
1. I have reviewed this quarterly report on Form 10-QSB of CREDO Petroleum
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
As of April 30, 2003 (Unaudited) and October 31, 2002
For the Six and Three Month Periods Ended April 30, 2003 and 2002
For Withhold
--- --------
Clarence H. Brown 2,789,063 6,519
James T. Huffman 2,717,719 77,863
Section 906 of the Sarbanes-Oxley Act
(18 U.S.C. Section 1350)
Section 906 of the Sarbanes-Oxley Act
(18 U.S.C. Section 1350)
CREDO PETROLEUM CORPORATION
Consolidated Balance Sheets
A S S E T S
April 30, October 31,
2003 2002
------------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,662,000 $ 1,324,000
Short term investments 5,258,000 5,586,000
Receivables:
Trade 569,000 577,000
Accrued oil and gas sales 849,000 535,000
Other 202,000 390,000
------------ ------------
8,540,000 8,412,000
------------ ------------
OIL AND GAS PROPERTIES, net,
using full cost method:
Unevaluated 2,495,000 1,690,000
Evaluated 9,500,000 7,987,000
------------ ------------
11,995,000 9,677,000
------------ ------------
EXCLUSIVE LICENSE AGREEMENT,
net of accumulated amortization
of $187,000 in 2003 and
$152,000 in 2002 513,000 548,000
OTHER, net 145,000 174,000
------------ ------------
$ 21,193,000 $ 18,811,000
============ ============
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 $ 2,239,000 $ 1,733,000
Income taxes payable 43,000 49,000
------------ ------------
2,282,000 1,782,000
------------ ------------
DEFERRED INCOME TAXES 2,848,000 2,314,000
EXCLUSIVE LICENSE OBLIGATION,
less current portion of $48,000 408,000 408,000
ASSET RETIREMENT OBLIGATION 199,000 -
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,
4,334,000 shares issued in 2003
and 3,678,000 issued in 2002 433,000 367,000
Capital in excess of par value
including $6,211,000 related
to 20% stock dividend in 2003 12,664,000 6,453,000
Retained earnings, net of
$6,277,000 related to
20% stock dividend in 2003 3,119,000 8,209,000
Other comprehensive income - 37,000
Treasury stock, at cost,
399,000 shares in 2003 and
398,000 shares in 2002 (760,000) (759,000)
------------ ------------
15,456,000 14,307,000
------------ ------------
$ 21,193,000 $ 18,811,000
============ ============
See accompanying notes.
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
2003 2002 2003 2002
---------- ---------- ---------- ----------
REVENUES:
Oil and gas sales $3,034,000 $2,177,000 $1,445,000 $1,131,000
Operating 251,000 242,000 125,000 116,000
Investment income
and other 190,000 74,000 114,000 65,000
---------- ---------- ---------- ----------
3,475,000 2,493,000 1,684,000 1,312,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Oil and gas
production 692,000 658,000 365,000 298,000
Depreciation,
depletion and
amortization 605,000 558,000 282,000 292,000
General and
administrative 606,000 485,000 328,000 242,000
Interest 23,000 25,000 12,000 13,000
---------- ---------- ---------- ----------
1,926,000 1,726,000 987,000 845,000
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES AND
ACCOUNTING CHANGE 1,549,000 767,000 697,000 467,000
INCOME TAXES (434,000) (230,000) (195,000) (140,000)
---------- ---------- ---------- ----------
INCOME BEFORE
ACCOUNTING CHANGE 1,115,000 537,000 502,000 327,000
CUMULATIVE EFFECT ON
PRIOR YEARS OF
SFAS 143-ACCOUNTING
FOR ASSET RETIREMENT
OBLIGATIONS (NET OF
TAXES OF $28,000) 72,000 - - -
---------- ---------- ---------- ----------
NET INCOME 1,187,000 537,000 502,000 327,000
RETAINED EARNINGS,
BEGINNING OF PERIOD 8,209,000 6,927,000 8,894,000 7,137,000
20% STOCK DIVIDEND (6,277,000) - (6,277,000) -
---------- ---------- ---------- ----------
RETAINED EARNINGS,
END OF PERIOD $3,119,000 $7,464,000 $3,119,000 $7,464,000
========== ========== ========== ==========
BASIC INCOME PER
SHARE BEFORE
ACCOUNTING CHANGE $ .28 $ .14 $ .13 $ .08
CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING
PRINCIPLE .02 - - -
------ ------ ------ ------
BASIC NET INCOME
PER SHARE $ .30 $ .14 $ .13 $ .08
====== ====== ====== ======
DILUTED INCOME PER SHARE
BEFORE ACCOUNTING CHANGE $ .28 $ .14 $ .13 $ .08
CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING
PRINCIPLE .02 - - -
------ ------ ------ ------
DILUTED NET INCOME
PER SHARE $ .30 $ .14 $ .13 $ .08
====== ====== ====== ======
See accompanying notes.
CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Six Months Ended
April 30,
--------------------------
2003 2002
----------- ------------
OPERATING ACTIVITIES:
Net income $ 1,187,000 $ 537,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and amortization 605,000 558,000
Deferred income taxes 506,000 95,000
Cumulative effect on change in accounting
principle (72,000) -
Changes in operating assets and liabilities:
Proceeds from short term investments 1,046,000 3,276,000
Purchase of short term investments (718,000) (3,710,000)
Trade receivables 8,000 54,000
Accrued oil and gas sales (314,000) (107,000)
Other 151,000 45,000
Accounts payable 506,000 92,000
Income tax payable (6,000) (84,000)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,899,000 756,000
----------- ------------
INVESTING ACTIVITIES:
Additions to oil and gas properties, net (2,569,000) (709,000)
Changes in other long-term assets 9,000 (48,000)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (2,560,000) (757,000)
----------- ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options
(75,000 options in 2002) - 145,000
Purchase of treasury stock
(100 shares in 2003 and 4,400 in 2002) (1,000) (25,000)
----------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,000) 120,000
----------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS 338,000 119,000
CASH AND CASH EQUIVALENTS:
Beginning of Period 1,324,000 819,000
----------- ------------
End of Period $ 1,662,000 $ 938,000
=========== ============
Supplemental Cash Flow Information:
Cash paid for income taxes $ - $ 50,000
=========== ============
See accompanying notes.
The company had a futures market net loss of $548,000 in the second quarter
resulting primarily from the closing of the March 2003 natural gas hedge
position of 110 MMcf at a loss of $558,000, or $5.07 per Mcf. The futures market
net loss was substantially offset by the March 2003 Index cash price of
approximately $8.50 in the market areas to which the hedge related.
Six Months Ended Three Months Ended
April 30, April 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net Income $ 1,187,000 $ 537,000 $ 502,000 $ 327,000
Other comprehensive
income, net of tax:
Change in fair
value of futures
contracts used for
natural gas
hedging (37,000) (119,000) 113,000 (306,000)
----------- ----------- ----------- -----------
Comprehensive income $ 1,150,000 $ 418,000 $ 615,000 $ 21,000
=========== =========== =========== ===========
Six Months Six Months Percent Percent
Ended April 30, 2003 Ended April 30, 2002 Volume Price
-------------------- --------------------
Product Volume Price Volume Price Change Change
------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 630,700 $ 4.04(1) 620,200 $ 2.96(3) + 2% +36%
Oil (bbls) 17,300 $28.27 17,900 $19.06 - 4% +48%
Three Months Three Months Percent Percent
Ended April 30, 2003 Ended April 30, 2002 Volume Price
-------------------- --------------------
Product Volume Price Volume Price Change Change
------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 317,700 $ 3.77(2) 329,600 $ 2.90(4) - 4% +30%
Oil (bbls) 8,100 $30.55 8,300 $21.06 - 2% +45%
___________________________________
(1) Includes $.69 Mcf hedging loss.
(2) Includes $1.72 Mcf hedging loss.
(3) Includes $.54 Mcf hedging gain.
(4) Includes $.45 Mcf hedging gain.
The company's growth strategy focuses on two core projects - drilling along the
Anadarko Shelf of Oklahoma and application of its patented Calliope gas recovery
technology.
Calliope Gas Recovery Technology. The company owns the exclusive right to a
patented technology known as the Calliope Gas Recovery System. Calliope can
achieve substantially lower flowing bottom hole pressure than conventional
production methods because it does not rely on reservoir pressure to lift
liquids. In many gas wells, lower bottom hole pressure translates into recovery
of substantial additional gas reserves.
STOCK DIVIDEND
Six Months Ended Three Months Ended
April 30, April 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Income as reported $1,187,000 $ 537,000 $ 502,000 $ 327,000
Pro forma stock
compensation expense,
net of tax (24,000) (36,000) (12,000) (18,000)
Pro forma net income $1,163,000 $ 501,000 $ 490,000 $ 309,000
========== ========== ========== ==========
Basic net income
per share:
As reported $ 0.30 $ 0.14 $ 0.13 $ 0.08
======= ======= ======= =======
Pro forma $ 0.29 $ 0.13 $ 0.13 $ 0.08
======= ======= ======= =======
Diluted net income
per share:
As reported $ 0.30 $ 0.14 $ 0.13 $ 0.08
======= ======= ======= =======
Pro forma $ 0.29 $ 0.13 $ 0.13 $ 0.08
======= ======= ======= =======
INCOME TAXES
Quarter Ended April 30, 2003 Compared to Quarter Ended April 30, 2002
FORWARD-LOOKING STATEMENTS
Date: June 13, 2003 By: /s/ James T. Huffman
------------------------------
James T. Huffman
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ John A. Alsko
------------------------------
John A. Alsko
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ James T. Huffman
-----------------------------------
James T. Huffman
Chief Executive Officer
I, John A. Alsko, Vice President and Chief Financial Officer of CREDO Petroleum
Corporation, certify that:
/s/ John A. Alsko
-----------------------------------
John A. Alsko
Vice President and
Chief Financial Officer
End of Filing
©2000-2003 CREDO Petroleum Corporation. All rights
reserved. |
