SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For Quarter Ended April 30, 2004
Commission File Number 0-8877
CREDO PETROLEUM CORPORATION
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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303-297-2200 (Telephone Number)
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, 2004: Common stock, $.10
par value - 6,036,849 Preferred stock, no par value - None issued
CREDO PETROLEUM CORPORATION
Index to Form 10-QSB
For Quarter Ended April 30, 2004
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets As of April 30, 2004 (Unaudited) and October
31, 2003
Consolidated Statements of Earnings and Changes in Retained Earnings (Unaudited)
For the Six and Three Month Periods Ended April 30, 2004 and 2003
Consolidated Statements of Cash Flows (Unaudited) For the Six Month Periods
Ended April 30, 2004 and 2003
Management's Discussion and Analysis of Financial Condition and Results of
Operations
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on March 11, 2005.
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 3,405,223 78,302
William F. Skewes 3,372,827 110,698
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(2) Hein + Associates LLP was approved as the independent auditors of the
Company for the fiscal year 2004. The shareholders voted 3,458,131 for and
21,553 against this appointment, with 3,841 abstentions.
There were 530,946 non-votes for each matter voted upon.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification by Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer and Chief Financial Officer
under Section 906 of the
Sarbanes-Oxley Act (18
U.S.C. Section 1350)
(b) Reports on Form 8-K
On March 12, 2004 CREDO Petroleum Corporation filed a current report on
Form 8-K reporting under Item 9 pursuant to Item 12 that we had issued a press
release announcing our financial results for the quarter ended January 31,
2004.
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. These consolidated financial
statements should be read in conjunction with the company's Form 10-KSB for
the fiscal year ended October 31, 2003.
CREDO PETROLEUM CORPORATION
Consolidated Balance Sheets
A S S E T S
April 30, October 31,
2004 2003
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 908,000 $ 1,885,000
Short term investments 6,476,000 4,778,000
Receivables:
Trade 982,000 410,000
Accrued oil and gas sales 1,437,000 1,256,000
Other 175,000 234,000
------------ ------------
Total current assets 9,978,000 8,563,000
------------ ------------
OIL AND GAS PROPERTIES, net,
at cost, using full cost method:
Unevaluated 2,494,000 2,075,000
Evaluated 12,683,000 11,986,000
------------ ------------
Net oil and gas properties 15,177,000 14,061,000
------------ ------------
EXCLUSIVE LICENSE AGREEMENT, net of
amortization of $256,000 in 2004
and $221,000 in 2003 443,000 478,000
OTHER, net 1,004,000 470,000
------------ ------------
$ 26,602,000 $ 23,572,000
============ ============
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 and
accrued liabilities $ 2,603,000 $ 1,776,000
Income taxes payable 257,000 210,000
------------ ------------
Total current liabilities 2,860,000 1,986,000
------------ ------------
DEFERRED INCOME TAXES, net 3,979,000 3,358,000
EXCLUSIVE LICENSE OBLIGATION, less
current obligations of $53,000 355,000 355,000
ASSET RETIREMENT OBLIGATION 270,000 238,000
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,
6,340,000 shares issued in
2004 and 2003 634,000 634,000
Capital in excess of par value 12,463,000 12,463,000
Retained earnings, net of
$6,277,000 related to 20% stock
dividend in 2003 7,013,000 5,062,000
Other comprehensive income (loss) (462,000) 180,000
Treasury stock, at cost,
322,000 shares in 2004 and
378,000 shares in 2003 (510,000) (704,000)
------------ ------------
Total stockholders' equity 19,138,000 17,635,000
------------ ------------
$ 26,602,000 $ 23,572,000
============ ============
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
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES:
Oil and gas sales $ 4,706,000 $ 3,034,000 $ 2,101,000 $ 1,445,000
Operating 292,000 251,000 155,000 125,000
Investment income
and other 125,000 190,000 17,000 114,000
----------- ----------- ----------- -----------
5,123,000 3,475,000 2,273,000 1,684,000
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Oil and gas production 932,000 692,000 472,000 365,000
Depreciation, depletion
and amortization 791,000 605,000 362,000 282,000
General and
administrative 667,000 606,000 336,000 328,000
Interest 23,000 23,000 11,000 12,000
----------- ----------- ----------- -----------
2,413,000 1,926,000 1,181,000 987,000
----------- ----------- ----------- -----------
INCOME BEFORE
INCOME TAXES AND
ACCOUNTING CHANGE 2,710,000 1,549,000 1,092,000 697,000
INCOME TAXES (759,000) (434,000) (306,000) (195,000)
----------- ----------- ----------- -----------
INCOME BEFORE
ACCOUNTING CHANGE 1,951,000 1,115,000 786,000 502,000
CUMULATIVE EFFECT ON
PRIOR YEARS OF
SFAS 143-ACCOUNTING
FOR ASSET RETIREMENT
OBLIGATIONS (NET OF
TAXES OF $28,000) - 72,000 - -
----------- ----------- ----------- -----------
NET INCOME 1,951,000 1,187,000 786,000 502,000
RETAINED EARNINGS,
BEGINNING OF PERIOD 5,062,000 8,209,000 6,227,000 8,894,000
20% STOCK DIVIDEND - (6,277,000) - (6,277,000)
----------- ----------- ----------- -----------
RETAINED EARNINGS,
END OF PERIOD $ 7,013,000 $ 3,119,000 $ 7,013,000 $ 3,119,000
=========== =========== =========== ===========
BASIC INCOME PER SHARE
BEFORE ACCOUNTING
CHANGE $ .32 $ .19 $ .13 $ .08
CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING
PRINCIPLE - .01 - -
------- ------- ------- -------
BASIC NET INCOME
PER SHARE $ .32 $ .20 $ .13 $ .08
======= ======= ======= =======
DILUTED INCOME PER SHARE
BEFORE ACCOUNTING CHANGE $ .32 $ .19 $ .13 $ .08
CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING
PRINCIPLE - .01 - -
------- ------- ------- -------
DILUTED NET INCOME
PER SHARE $ .32 $ .20 $ .13 $ .08
======= ======= ======= =======
See accompanying notes.
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CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Six Months Ended
April 30,
2004 2003
----------- -----------
OPERATING ACTIVITIES:
Net income $ 1,951,000 $ 1,187,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 791,000 605,000
Deferred income taxes 621,000 506,000
Cumulative effect of change
in accounting principle - (72,000)
Other - -
Changes in operating assets and liabilities:
Proceeds from short term investments 421,000 1,046,000
Purchase of short term investments (2,119,000) (718,000)
Trade receivables (572,000) 8,000
Accrued oil and gas sales (181,000) (314,000)
Other (17,000) 151,000
Accounts payable and accrued costs and expenses 326,000 506,000
Income tax payable 47,000 (6,000)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,268,000 2,899,000
----------- -----------
INVESTING ACTIVITIES:
Additions to oil and gas properties, net (1,945,000) (2,569,000)
Proceeds from sale of oil and gas properties 149,000 -
Changes in other long-term assets (643,000) 9,000
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,439,000) (2,560,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options
(58,500 options in 2004) 233,000 -
Purchase of treasury stock
(2,000 shares in 2004 and 100 shares in 2003) (39,000) (1,000)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 194,000 (1,000)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (977,000) 338,000
CASH AND CASH EQUIVALENTS:
Beginning of Period 1,885,000 1,324,000
----------- -----------
End of Period $ 908,000 $ 1,662,000
=========== ===========
Supplemental Cash Flow Information:
Cash paid for income taxes $ 98,000 $ -
=========== ===========
See accompanying notes.
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CREDO PETROLEUM CORPORATION Management's
Discussion and Analysis of Financial Condition and Results of Operations April
30, 2004
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2004, working capital was $7,118,000, compared with $6,577,000
at October 31, 2003. Net cash provided by operating activities for the first
six months of 2004 and 2003 was $1,268,000 and $2,899,000, respectively and
comprises primarily net income, depreciation, depletion and amortization
("DD&A"), deferred income taxes, reduced by net
(increases)/decreases in short-term investments, and increases in accrued oil
and gas sales in each of the two periods. For 2004, such amounts are
$1,951,000, $791,000, $621,000, $(1,698,000), and $(181,000), respectively.
For 2003, such amounts are $1,187,000, $605,000, $506,000, $328,000, and
$314,000, respectively. For the six months ended April 30, 2004 and 2003, cash
used in investing activities was $2,439,000 and $2,560,000, respectively.
Investing activities primarily included oil and gas exploration and
development expenditures, including Calliope, totaling $1,945,000 and
$2,569,000, respectively. Additional expenditures for oilfield casing and
tubing were incurred in March 2004, and are classified as other long-term
assets. The company purchased these tubulars to insure availability for the
current drilling program.
The average return on CREDO's investments during the first six months was
2% in 2004 and 4% in 2003. At April 30, approximately 66% of the investments
were directly invested in mutual funds and brokerage accounts managed by
professional money managers. Remaining investments are in managed partnerships
that use various strategies to minimize their correlation to stock market
movements. Most of the investments are highly liquid, and the company believes
they represent a responsible approach to cash management. In the company's
opinion, the greatest investment risk is the potential for negative market
impact from unexpected, major adverse news, such as the September 11th
terrorist attacks.
Existing working capital and anticipated cash flow are expected to be
sufficient to fund 2004 operations. Because earnings are anticipated to be
reinvested in operations, cash dividends are not expected to be paid in the
foreseeable future. Commitments for future capital expenditures were not
material at April 30, 2004. The company has no defined benefit plans and no
obligations for post retirement employee benefits.
PRODUCT PRICES AND PRODUCTION
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. Since 1991, the company has periodically
hedged natural gas prices by forward selling a portion of its estimated
production in the NYMEX futures market. This is generally done when (i) the
price relationship (the "basis") between the futures markets and the
cash markets where the company sells its gas is stable within historical
ranges, and (ii) in the company's opinion, the current price is adequate to
insure reasonable returns at a time when downside price risks appear to be
substantial. The company closes its hedges by purchasing offsetting
"long" positions in the futures market at then prevailing prices.
Accordingly, the gain or loss on the hedge position will depend on futures
prices at the time offsetting "long" positions are purchased.
Hedging gains and losses are included in revenues from oil and gas sales. The
company believes its most significant hedging risk is that expected
correlations in price movements as discussed above do not occur, and thus,
that gains or losses in one market are not fully offset by opposite moves in
the other market.
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.
The company realized hedging losses of $57,000 and $437,000 for the six
months ended April 30, 2004 and 2003, respectively. The company realized
hedging losses of $137,000 and $548,000 for the comparable quarters ended
April 30, 2004 and 2003. At April 30, 2004 the company has recorded in other
comprehensive income net deferred losses of approximately $642,000 ($462,000
net of tax) related to natural gas hedging transactions.
At second quarter-end, the company had open hedge positions totaling 600 MMcfg
covering the months of May through October 2004 at an average NYMEX price of
$4.81 per Mcf. Also at second quarter-end, the May hedge was closed and a
deferred loss of $112,000 was realized. The remaining hedges are ratably
allocated to June through October 2004, and are expected to cover less than
65% of the company's estimated total production for those five months. Average
gas prices in the company's market areas are expected to be 15% to 17% below
NYMEX prices due to basis differentials and transportation costs.
During 2004 the company entered into a bank hedging line of credit facility
with a maximum threshold amount of $2,000,000. At April 30, 2004, 30% of the
company's open natural gas hedge positions were covered by this agreement. The
company also hedged the basis differential between the NYMEX and Panhandle
Eastern Pipeline Co. prices on 200 MMcfg for the months of May 2004 through
October 2004.
The following table sets forth the components of Comprehensive Income for
each of the periods presented:
Six Months Ended Three Months Ended
April 30, April 30,
2004 2003 2004 2003
----------- ----------- --------- ---------
Net Income $ 1,951,000 $ 1,187,000 $ 786,000 $ 502,000
Other comprehensive
income (loss),
net of tax:
Change in fair value
of futures
contracts used for
natural gas hedging (642,000) (37,000) (279,000) 113,000
----------- ----------- --------- ---------
Comprehensive income $ 1,309,000 $ 1,150,000 $ 507,000 $ 615,000
=========== =========== ========= =========
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Oil and gas sales volume and price comparisons for the indicated periods
are set forth below. Price realizations include the sales price and hedging
gains and losses.
Six Months Six Months Percent Percent
Ended April 30, 2004 Ended April 30, 2003 Volume Price
-------------------- --------------------
Product Volume Price Volume Price Change Change
------- ------- ------- ------- ------- ------ ------
Gas (Mcf) 861,000 $ 4.69(1) 630,700 $ 4.04(3) + 36% + 16%
Oil (bbls) 21,200 $31.58 17,300 $28.27 + 23% + 12%
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Three Months Three Months Percent Percent
Ended April 30, 2004 Ended April 30, 2003 Volume Price
-------------------- --------------------
Product Volume Price Volume Price Change Change
------- ------- ------- ------- ------- ------ ------
Gas (Mcf) 403,000 $ 4.30(2) 317,700 $ 3.77(4) + 27% + 14%
Oil (bbls) 11,200 $32.77 8,100 $30.55 + 38% + 7%
_____________________________
(1) Includes $0.07 Mcf hedging loss.
(2) Includes $0.34 Mcf hedging loss.
(3) Includes $0.69 Mcf hedging loss.
(4) Includes $1.72 Mcf hedging loss.
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OPERATIONS
The company's business focuses on two core projects--natural gas drilling
along the shelf of the Northern Anadarko Basin of Oklahoma and application of
its patented Calliope Gas Recovery System. The company believes that, in
combination, these two projects provide an excellent (and possibly unique)
balance for achieving its goal of adding long-lived gas reserves and
production at reasonable costs and risks.
Anadarko Shelf Drilling Program. The company drills primarily for natural
gas on its 40,000 gross acre inventory located along the northern shelf of the
Anadarko Basin of Oklahoma. During fiscal 2004, the company has drilled eight
wells in this area with an 88% success rate. Three previously reported wells
have been completed for production. One additional well is awaiting completion
and pipeline connection. All of the completions occurred after second
quarter-end. Seven new wells are currently on the summer drilling schedule.
The Rosalee #1-9 was recently drilled on the company's 17,000 gross acre
Sand Creek Prospect located in Ellis and Harper Counties, Oklahoma. It is the
21st well drilled on the prospect, and established production about one mile
west of the Bobby John #1-10. The 7,825-foot well encountered 10 feet of
porous Morrow sand and is currently producing from a natural completion on an
18\64-inch choke at a daily rate of 1.15 MMcfg (million cubic feet of gas per
day). A north offset has been permitted. CREDO is the operator and owns a 26%
working interest.
About one mile to the west, the company drilled a north offset to a new oil
discovery flowing in excess of 100 barrels of oil per day from the Oswego
limestone formation. The well resulted in a dry hole. The company has a very
small working interest in the discovery well.
Approximately seven miles to the north, the Eva #1-34 was recently
completed on the company's 6,000 gross acre Two Springs Prospect in Harper
County. It is the seventh well drilled on the prospect and extended Morrow
sand production about one-half mile north of the Gillenwaters #1-34. The
7,200-foot well encountered seven feet of porous Morrow sand with excellent
pressure. Prior to fracture stimulation, it is producing from a natural
completion on a 24\64-inch choke at a daily rate in excess of 700 Mcfg
(thousand cubic feet of gas). CREDO is the operator and owns a 34% working
interest.
Approximately eight miles to the north, the Owens #1-21 has been completed
as a new oil discovery on the company's 2,560 gross acre Buffalo Creek
Prospect in Harper County. The 6,900-foot well encountered 14 feet of porous
Oswego limestone and is currently producing on pump at the daily rate in
excess of 100 barrels of oil and 100 Mcfg. This well is also awaiting
stimulation. CREDO is the operator and owns a 31% working interest. Two
additional wells are being permitted for drilling and more wells are expected.
About 11 miles east of the Rosalee, the company has drilled the first well
on its 1,920 gross acre Horseshoe Prospect in Harper County. The 7,200-foot
well encountered six feet of porous Morrow sand. Drilling data and electric
logs indicate that it will be productive and it is awaiting completion and
pipeline connection. CREDO is the operator and owns a 49% working interest.
Seven additional wells are currently on the summer drilling schedule. A
rank wildcat will test the company's new 1,920 gross acre Glacier Prospect in
Harper County, Oklahoma. The prospect is located about five miles east of the
Sand Creek Prospect. CREDO will operate five of the scheduled wells and is
currently waiting on rig availability which is anticipated in July.
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.
This year, the company has installed its Calliope Gas Recovery System on
two wells located in Oklahoma. Four systems are scheduled for installation.
The two completed installations are prototypes to test Calliope on wells
with known reservoir damage caused by the "parting shots" of
previous operators. These prototypes represent very rigorous challenges for
Calliope which could further expand its application envelope. The company is
performing a group of reservoir treatments designed to mitigate the reservoir
damage. Such procedures are generally not practical in low pressure reservoirs
because the treatment fluids load-up the well and are often impossible to
recover. Calliope can normally remove the fluids, thus substantially
increasing the probability of successfully treating low pressure reservoirs.
CREDO owns an 80% working interest in the wells and is the operator.
The company is preparing to install Calliope systems on four additional
wells. These wells are all located in Oklahoma and range in depth from 7,800
to 12,000 feet. They had cumulative production ranging up to 16.1 Bcfg
(billion cubic feet of gas). All of the wells were dead at the time of
purchase. These Calliope installations are expected at the rate of about one
per month barring any delays caused by a backlog for field services.
Calliope has proven to be reliable and flexible over a wide range of
applications on wells the company owns and operates. It has also proven to be
consistently successful. This has resulted in an impressive track record for
the new technology. Accordingly, the company has recently begun implementing
strategies to substantially increase the number of wells on which Calliope
will be installed.
STOCK SPLIT AND DIVIDEND
On March 24, 2004, the company declared a three-for-two stock split to
shareholders of record on April 5, 2004. Accordingly, 2,006,000 additional
shares were issued on April 20, 2004. Common stock has been increased by the
par value of the shares issued with a corresponding decrease in capital in
excess of par value.
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.
In both transactions, 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 split in 2004
and the stock dividend in 2003.
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. 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 six month periods ended April 30, 2004 and 2003, the company recognized
$6,000 and $4,000, respectively, of accretion expense on the liability.
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." Among other provisions, the
statement amends the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation." 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 SFAS No. 123, the company's net income and per share amounts
would have been reported as follows:
Six Months Ended Three Months Ended
April 30, April 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net Income as reported $ 1,951,000 $ 1,187,000 $ 786,000 $ 502,000
Pro forma stock
compensation expense,
net of tax (141,000) (24,000) (70,000) (12,000)
----------- ----------- ----------- -----------
Pro forma net income $ 1,810,000 $ 1,163,000 $ 716,000 $ 490,000
=========== =========== =========== ===========
Basic net income
per share:
As reported $ 0.32 $ 0.20 $ 0.13 $ 0.08
====== ====== ====== ======
Pro forma $ .30 $ 0.19 $ 0.12 $ 0.08
====== ====== ====== ======
Diluted net income
per share:
As reported $ 0.32 $ 0.20 $ 0.13 $ 0.08
====== ====== ====== ======
Pro forma $ 0.29 $ 0.19 $ 0.11 $ 0.08
====== ====== ====== ======
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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 energy 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, 2004 Compared to Six Months Ended April 30, 2003
For the six months ended April 30, 2004, net income rose 64% to $1,951,000
compared to $1,187,000 last year. Higher net income resulted primarily from a
35% increase in production volumes and a 15% increase in product prices.
Total revenues rose 47% to $5,123,000 compared to $3,475,000 last year. Oil
and gas sales rose 55% to $4,706,000 compared to $3,034,000 last year. Total
natural gas price realizations, including the effect of hedging transactions,
rose 16% to $4.69 per Mcf compared to $4.04 last year. Net wellhead prices for
oil rose 12% to $31.58 per barrel compared to $28.27 last year. Natural gas
production rose 36% to 861,000 Mcf compared to 630,700 Mcf last year and oil
production rose 23% to 21,200 bbls compared to 17,300 bbls last year. The
effect of these higher volumes and prices was to increase oil and gas sales by
$1,672,000. Operating income increased 16% due to an increase in drilling and
production overhead income from new operated wells. Investment income and
other decreased to $125,000 compared to $190,000, for the same six month
period last year due to a shift to more conservative investments and general
market declines.
Total costs and expenses increased 25% to $2,413,000 in the first six
months of fiscal 2004 compared to $1,926,000 last year. Oil and gas production
expenses rose 35%, or $240,000, due primarily to increased production taxes
resulting from increased production volumes and prices. Depreciation,
depletion and amortization increased 31% primarily due to increased production
and an increase in the amortizable full cost pool base. General and
administrative expenses increased 10% due to increases in salaries and wages,
consulting fees relating to increased regulatory requirements 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 both 2004 and 2003.
Three Months Ended April 30, 2004 Compared to Three Months Ended April 30,
2003
For the three months ended April 30, 2004, net income rose 57% to $786,000
compared to $502,000 last year. Higher net income resulted primarily from a
28% increase in production volumes and a 13% increase in product prices.
Total revenues rose 35% to $2,273,000 compared to $1,684,000 last year. Oil
and gas sales rose 45% to $2,101,000 compared to $1,445,000 the same quarter
last year. Total natural gas price realizations, including the effect of
hedging transactions, rose 14% to $4.30 per Mcf compared to $3.77 last year.
Net wellhead prices for oil rose 7% to $32.77 per barrel compared to $30.55
last year. Natural gas production rose 27% to 403,000 Mcf compared to 317,700
Mcf last year and oil production rose 38% to 11,200 bbls compared to 8,100
bbls last year. The effect of these higher volumes and prices was to increase
oil and gas sales by $656,000. Operating income increased 24% due to an
increase in drilling and production overhead income from new operated wells.
Investment income and other decreased to $17,000 compared to $114,000 last
year due to the overall market declines experienced during the second quarter
of 2004.
Total costs and expenses increased 20% to $1,181,000 in the second quarter
of fiscal 2004 compared to $987,000 the same quarter last year. Oil and gas
production expenses rose 29%, or $107,000, due primarily to increased
production taxes resulting from increased production volumes and prices as
well as increased oilfield costs. Depreciation, depletion and amortization
increased 27% primarily due to increased production and an increase in the
amortizable full cost pool base. General and administrative expenses increased
2% due to inflationary pressures.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounting for Oil and Gas Property Costs. As more fully discussed in Note
1 to the consolidated financial statements included with the company's Form
10-KSB for the fiscal year ended October 31, 2003, the company (i) follows the
full cost method of accounting for the costs of its oil and gas properties,
(ii) amortizes such costs using the units of production method, and (iii)
applies a quarterly full cost ceiling test. Adverse changes in conditions
(primarily gas price declines) could result in permanent write-downs in the
carrying value of oil and gas properties as well as non-cash charges to
operations, but would not affect cash flows.
Estimates of Proved Oil and Gas Reserves. An independent petroleum engineer
annually estimates approximately 60% of the company's proved reserves. The
company estimates the remainder. Reserve engineering is a subjective process
that is dependent upon the quality of available data and the interpretation
thereof. In addition, subsequent physical and economic factors such as the
results of drilling, testing, production and product prices may justify
revision of such estimates. Therefore, actual quantities, production timing,
and the value of reserves may differ substantially from estimates. A reduction
in proved reserves would result in an increase in depreciation, depletion and
amortization ("DD&A") expense. A large reduction in proved
reserve quantities or values could result in a permanent write-down in the
carrying value of oil and gas properties as discussed in Accounting for Oil
and Gas Property Costs above.
Estimates of Asset Retirement Obligations. In accordance with SFAS No 143,
the company makes estimates of future costs and the timing thereof in
connection with recording its future obligations to plug and abandon wells.
Estimated abandonment dates will be revised in the future based on changes to
related economic lives, which vary with product prices and production costs.
Estimated plugging costs may also be adjusted to reflect changing industry
experience. Increases in operating costs and decreases in product prices would
increase the estimated amount of the obligation and increase DD&A expense.
Cash flows would not be affected until costs to plug and abandon were actually
incurred.
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.
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) 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.
SIGNATURES
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 14, 2004
By: /s/ James T. Huffman
-----------------------------
James T. Huffman
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ James P. Garrett, Jr.
-----------------------------
James P. Garrett, Jr.
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934,
AS AMENDED AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's Board of
Directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control
over financial reporting.
Date: June 14, 2004
/s/ James T. Huffman
----------------------------------
James T. Huffman
Chief Executive Officer
|
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934,
AS AMENDED AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, James P. Garrett, Jr., Vice President and Chief Financial 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e) for the Registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;
b) Evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter (the Registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of Registrant's Board of
Directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control
over financial reporting.
Date: June 14, 2004
/s/ James P. Garrett, Jr.
----------------------------------
James P. Garrett, Jr.
Vice President and Chief Financial Officer
|
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CREDO Petroleum Corporation (the
"Company") on Form 10-QSB for the period ending April 30, 2004 as
filed with the Securities and Exchange on the date hereof (the
"Report"), we, James T. Huffman and James P. Garrett, Jr., President
and Chief Executive Officer, and Vice President and Chief Financial Officer,
respectively, of the Company, certify, pursuant to 18 U.S.C., SS 1350, as
adopted pursuant to SS 906 of the Sarbanes-Oxley Act of 2002, that to our
knowledge:
1. The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
June 14, 2004
/s/ James T. Huffman
----------------------------------
James T. Huffman
President and Chief Executive Officer
/s/ James P. Garrett, Jr.
----------------------------------
James P. Garrett, Jr.
Vice President and Chief Financial Officer
|
