Colorado 84-0772991
(State of Incorporation) (IRS Employer Identification)
1801 Broadway, Suite 900 80202
Denver, Colorado (Zip Code)
(Address of principal executive office)
|
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 August 31, 2001: Common stock, $.10 par value - 3,122,000 Preferred stock, no par value - None issued
Consolidated Balance Sheets
As of July 31, 2001 (Unaudited) and October 31, 2000
Consolidated Statements of Earnings and Changes in Retained Earnings (Unaudited) For the Nine and Three Month Periods Ended July 31, 2001 and 2000
Consolidated Statements of Cash Flows (Unaudited) For the Nine Month Periods Ended July 31, 2001 and 2000
Management's Discussion and Analysis of Financial Condition and Results of Operations
Not Applicable
The consolidated financial statements included herein have been prepared by the company without audit, and reflect 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. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the company's Form 10-KSB for the fiscal year ended October 31, 2000.
CREDO PETROLEUM CORPORATION
Consolidated Balance Sheets
A S S E T S
July 31, October 31,
2001 2000
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 614,000 $ 484,000
Short term investments 5,065,000 4,626,000
Receivables:
Trade 517,000 227,000
Accrued oil and gas sales 529,000 472,000
Other 105,000 108,000
----------- -----------
6,830,000 5,917,000
----------- -----------
OIL AND GAS PROPERTIES, net, at cost,
full cost method:
Unevaluated 2,204,000 1,601,000
Evaluated 6,119,000 5,134,000
----------- -----------
8,323,000 6,735,000
----------- -----------
EXCLUSIVE LICENSE AGREEMENT, net of
amortization of $65,000 in 2001
and $12,000 in 2000 635,000 688,000
----------- -----------
OTHER, net 216,000 166,000
----------- -----------
$16,004,000 $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 $ 1,204,000 $ 935,000
Income taxes payable 218,000 276,000
----------- -----------
1,422,000 1,211,000
----------- -----------
DEFERRED INCOME TAXES 1,802,000 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 6,558,000 4,925,000
Other comprehensive income 19,000 -
Treasury stock, at cost, 548,000 shares
in 2001 and 679,000 shares in 2000 (935,000) (1,176,000)
----------- -----------
12,280,000 10,387,000
----------- -----------
$16,004,000 $13,506,000
=========== ===========
See accompanying notes.
|
CREDO PETROLEUM CORPORATION
Consolidated Statements of Earnings And Changes in
Retained Earnings - Unaudited
Nine Months Nine Months Quarter Quarter
Ended Ended Ended Ended
July 31, July 31, July 31, July 31,
2001 2000 2001 2000
---------- ---------- ---------- ----------
REVENUES:
Oil and gas sales $4,029,000 $2,100,000 $1,319,000 $ 784,000
Operating 336,000 316,000 113,000 104,000
Investment income
and other 118,000 399,000 9,000 54,000
Non-recurring
litigation settlement - 345,000 - -
---------- ---------- ---------- ----------
4,483,000 3,160,000 1,441,000 942,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Oil and gas production 879,000 680,000 280,000 246,000
Depreciation, depletion
and amortization 590,000 462,000 226,000 157,000
General and
administrative 641,000 582,000 205,000 156,000
Interest 40,000 - 14,000 -
---------- ---------- ---------- ----------
2,150,000 1,724,000 725,000 559,000
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES 2,333,000 1,436,000 716,000 383,000
INCOME TAXES (700,000) (431,000) (215,000) (94,000)
---------- ---------- ---------- ----------
NET INCOME 1,633,000 1,005,000 501,000 289,000
RETAINED EARNINGS,
BEGINNING OF PERIOD 4,925,000 3,578,000 6,057,000 4,294,000
---------- ---------- ---------- ----------
RETAINED EARNINGS,
END OF PERIOD $6,558,000 $4,583,000 $6,558,000 $4,583,000
========== ========== ========== ==========
BASIC NET INCOME
PER SHARE $ .53 $ .34 $ .16 $ .10
====== ====== ====== ======
DILUTED NET INCOME
PER SHARE $ .50 $ .32 $ .15 $ .09
====== ====== ====== ======
See accompanying notes.
|
CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Nine Months Ended
July 31,
-------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net income $ 1,633,000 $ 1,005,000
Noncash expenses included in net income:
Depreciation, depletion and amortization 590,000 462,000
Deferred income taxes 394,000 132,000
Changes in operating assets and liabilities:
Proceeds from short term investments 3,109,000 1,261,000
Purchase of short term investments (3,548,000) (2,223,000)
Trade receivables (290,000) 79,000
Accrued oil and gas sales (57,000) (121,000)
Other 22,000 18,000
Accounts payable 269,000 (10,000)
Income tax payable (58,000) 99,000
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,064,000 702,000
----------- -----------
INVESTING ACTIVITIES:
Oil and gas properties, net (2,087,000) (577,000)
Changes in long-term assets (88,000) (63,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,175,000) (640,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 271,000 -
Purchase of treasury stock (30,000) -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 241,000 -
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 130,000 62,000
CASH AND CASH EQUIVALENTS:
Beginning of Period 484,000 184,000
----------- -----------
End of Period $ 614,000 $ 246,000
=========== ===========
See accompanying notes.
|
and Results of Operations July 31, 2001
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital and cash flow represent a significant capital resource and source of liquidity. At July 31, 2001, working capital was $5,408,000, compared to $4,706,000 at October 31, 2000. Cash flow from operating activities before working capital changes totaled $2,617,000 for the nine months, up 64% from the same period last year. Cash flow was used to fund net oil and gas property expenditures totaling $2,087,000.
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 nine months of fiscal 2001 compared to 10% in the same period last year. The decline in investment returns primarily reflects a volatile and down trending stock market during fiscal 2001 which limits investment opportunities for the market timers which manage the bulk of the company's investments. By comparison to the company's investment returns, at July 31, 2001, the Dow was down 4.09%, the S&P 500 was down 15.26%, and the NASDAQ was down 39.84%.
Commitments for future capital expenditures were approximately $500,000 at July 31, 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 July 31, 2001, open hedge positions totaled 420,000 Mcfg (thousand cubic feet of gas) at an average price of $3.72 per Mcf and represented approximately 92% of estimated natural gas production for the months of September 2001 through March 2002. The company deferred a realized gain of $140,000 for the August hedge (60,000 Mcf) which was closed prior to July 31, 2001. Subsequent to July 31, 2001, the September hedge (60,000 Mcf) was closed and a $127,000 gain was realized. The company currently has open hedge positions totaling 360,000 Mcfg covering the months of October 2001 through March 2002 at an average price of $3.61 per Mcf. This hedge represents approximately 92% 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. At July 31, 2001, deferred net gains of approximately $27,000 ($19,000 net of tax) related to natural gas hedging transactions were accumulated in Other Comprehensive Income.
The following table sets forth the components of Comprehensive Income for each of the periods ended July 31:
Nine Months Ended Three Months Ended
July 31, July 31,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net Income $1,633,000 $1,005,000 $ 501,000 $ 289,000
Change in fair value of
derivatives designated
as cash flow hedges 19,000 - (42,000) -
---------- ---------- ---------- ----------
Comprehensive income $1,652,000 $1,005,000 $ 459,000 $ 289,000
========== ========== ========== ==========
|
Oil and gas sales volume and price comparisons for the indicated periods are set forth below.
Nine Months Nine Months Percent Percent
Ended July 31, 2001 Ended July 31, 2000 Volume Price
------------------- -------------------
Product Volume Price Volume Price Change Change
------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 565,800 $ 5.46(1) 511,800 $ 2.62(2) + 11% +108%
Oil (bbls) 34,500 $27.25 28,400 $26.72 + 21% + 2%
|
Three Months Three Months Percent Percent
Ended July 31, 2001 Ended July 31, 2000 Volume Price
------------------- -------------------
Product Volume Price Volume Price Change Change
------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 219,900 $ 4.63(3) 166,400 $ 3.09(4) + 32% + 50%
Oil (bbls) 11,700 $25.75 9,300 $28.90 + 26% - 11%
(1) Includes $.52 Mcf hedging gain.
(2) Includes $.09 Mcf hedging loss.
(3) Includes $1.02 Mcf hedging gain.
(4) Includes $.29 Mcf hedging loss.
|
Capital spending increased to a record $2,087,000 for the first nine months of fiscal 2001 as the company deployed increased cash flows into oil and gas assets. The company's growth strategy focuses on two core projects - application of its patented Calliope gas recovery technology and drilling along the Anadarko Shelf of Oklahoma.
During fiscal 2001, ten successful wells were completed in connection with the company's drilling program along the Anadarko Shelf of Oklahoma, of which nine were gas wells and one was oil. The significant increase in gas and oil production for both the nine-month (13%) and three-month (30%) periods resulted primarily from new wells placed on stream during the periods. The most important addition to gas production came from the company's 60% owned 7,800-foot Bill-Judy Brown #1-6 well located in Beaver County, Oklahoma which was completed for production in May, 2001. The well was completed in the third quarter of fiscal 2001 and production has stabilized at a daily rate of 850 Mcfg on a 25/64-inch choke. The company is the Operator of the well. In addition, two wells on which the company's Calliope fluid lift system was installed made substantial contributions to the increase in fiscal 2001 production volumes.
The primary contributor to the increased oil production is the Wilkerson #1 well located in Beaver County, Oklahoma in which the company owns an 15% interest. Production has stabilized at a daily rate of 280 barrels of oil and 500 Mcfg on a 15/64-inch choke.
The company's patented Calliope technology has continued to make a significant impact on production and revenues. Calliope wells contributed 23% of gas production for the first nine months of fiscal 2001. 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 were dead 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 third quarter end, the company participated for an 11% interest in drilling the 8,900-foot Jacoby "10" #1 well in Ellis County, Oklahoma. The well was recently completed and is producing from the Oswego formation at the daily rate of approximately 3.9 MMcfg and 207 barrels of oil.
Production from 22 wells drilled on the company's 10% owned Recluse coal bed methane property located in north-central Wyoming were placed on stream subsequent to third quarter end. 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 drilling the Glendena #1 well on its 1,280-acre Sand Creek Prospect located in Ellis County, Oklahoma. CREDO owns 40% of the 7,650-foot Morrow formation test and is Operator of the well.
The company is currently committed to participate with interests ranging from 11% to 40% in drilling three 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
Nine Months Ended July 31, 2001 Compared to Nine Months Ended July 31, 2000
For the nine months ended July 31, 2001, net income from continuing operations (excluding a one time litigation settlement last year) increased 114% to $1,633,000 compared to $764,000 last year. Including the prior year litigation settlement, net income increased 62% to $1,633,000 compared to $1,005,000 for the same period last year.
Total revenues increased 42% to $4,483,000 for the nine months ended July 31, 2001 compared to $3,160,000 last year. Oil and gas sales increased $1,929,000, or 92%, to $4,029,000. 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 108% to $5.46 per Mcf compared to $2.62 last year. Hedging transactions increased 2001 price realizations by $.52 per Mcf, or 11% compared to a decrease in 2000 price realizations from hedging transactions of $.09 per Mcf, or 3%. Net wellhead prices for gas increased 82% to $4.94 per Mcf compared to $2.71 last year. Net wellhead prices for oil increased 2% to $27.25 per barrel compared to $26.72 last year. The net effect of these price changes, including hedging transactions, was to increase oil and gas sales by $1,469,000. Gas volumes increased 11% and oil volumes increased 21%. The net effect of volume changes was to increase oil and gas sales by $460,000. Operating income increased $20,000, or 6%, due to drilling overhead income and additional operated properties. As discussed on page 6, the average return on the company's investments was 3% compared to 10% last year due primarily to a volatile and down trending stock market during the nine months 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 ($241,000 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 25% to $2,150,000 for the nine months ended July 31, 2001 compared to $1,724,000 last year. The 29% increase in oil and gas production expenses primarily reflects increased production taxes on higher oil and gas sales revenue. Depreciation, depletion and amortization increased 28% due to increases in oil and gas production and amortization of the cost of an exclusive license agreement which was not effective in the prior year period. General and administrative expenses rose 10% due to inflationary pressures and the timing of certain expenditures. Interest expense relates to the accrual of interest on the exclusive license agreement note payment, due on September 1, 2001, which was not effective in the prior year period. Income taxes were provided at 30% in fiscal 2001 and in the prior fiscal period.
Quarter Ended July 31, 2001 Compared to Quarter Ended July 31, 2000
Net income for the quarter ended July 31, 2001 increased 73% to $501,000 compared to $289,000 for the same quarter last year.
Total revenues increased 53% to $1,441,000 in the third quarter of 2001 compared to $942,000 for the same quarter last year. Oil and gas sales increased 68% to $1,319,000 compared to $784,000 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 50% to $4.63 per Mcf compared to $3.09 last year. Hedging transactions increased third quarter price realizations $1.02 per Mcf, or 28%, compared to a decrease in 2000 price realizations from hedging transactions of $.29 per Mcf, or 9%. Net wellhead prices for gas increased 7% to $3.61 per Mcf compared to $3.38 last year. Net wellhead prices for oil fell 11% to $25.75 per barrel compared to $28.90 last year. The net effect of these price changes and hedging transactions was to increase oil and gas sales $226,000. Gas volumes increased 32% and oil volumes increased 26%. The net effect of volume changes was to increase oil and gas sales $309,000. Operating income increased $9,000, or 9%, due to the addition of several operated wells. As discussed on page 6, the average return on the company's investments was 3% compared to 10% last year due primarily to a volatile and down trending stock market during the current quarter which limited investment opportunities for the market timers which manage the bulk of the company's investments.
Total costs and expenses increased 30% to $725,000 in the third quarter of 2001 compared to $559,000 last year. Oil and gas production expenses increased 14% due primarily to increased production taxes on higher oil and gas sales revenue. Depreciation, depletion and amortization increased 44% primarily due to increases in oil and gas production and amortization of the cost of an exclusive license agreement which was not effective in the prior year quarter. General and administrative expenses increased $49,000, or 31%, due to a one-time credit to such expenses last year to correct an error in the two preceding quarters. Interest expense relates to the accrual of interest on the exclusive license agreement note payment, due on September 1, 2001, which was not effective in the prior year period. Income taxes were provided at 30% in the third quarter of fiscal 2001 and 25% in the prior fiscal period.
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: September 11, 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
|
©2000-2004 CREDO Petroleum Corporation. All rights reserved. |
