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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 July 31, 2003
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 August 31, 2003: Common stock, $.10
par value - 3,945,000 Preferred stock, no par value - None issued
CREDO PETROLEUM CORPORATION
Index to Form 10-QSB
For Quarter Ended July 31, 2003
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets
As of July 31, 2003 (Unaudited) and October 31, 2002
Consolidated Statements of Earnings and Changes in Retained Earnings (Unaudited)
For the Nine and Three Month Periods Ended July 31, 2003 and 2002
Consolidated Statements of Cash Flows (Unaudited) For the Nine Month Periods
Ended July 31, 2003 and 2002
Management's Discussion and Analysis of Financial Condition and Results of
Operations
PART II - OTHER INFORMATION
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 under
Section 906 of the Sarbanes-Oxley Act
(18 U.S.C. Section 1350)
32.2 Certification by Chief Financial Officer under
Section 906 of the Sarbanes-Oxley Act
(18 U.S.C. Section 1350)
(b) Reports on Form 8-K
On June 18, 2003 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 second quarter 2003 financial results and updated
drilling results.
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.
CREDO PETROLEUM CORPORATION
Consolidated Balance Sheets
A S S E T S
July 31, October 31,
2003 2002
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,316,000 $ 1,324,000
Short term investments 4,993,000 5,586,000
Receivables:
Trade 876,000 577,000
Accrued oil and gas sales 797,000 535,000
Other 387,000 390,000
------------ ------------
9,369,000 8,412,000
------------ ------------
OIL AND GAS PROPERTIES, net,
using full cost method:
Unevaluated 2,595,000 1,690,000
Evaluated 10,777,000 7,987,000
------------ ------------
13,372,000 9,677,000
------------ ------------
EXCLUSIVE LICENSE AGREEMENT,
net of accumulated amortization of
$204,000 in 2003 and $152,000 in 2002 495,000 548,000
OTHER, net 151,000 174,000
------------ ------------
$ 23,387,000 $ 18,811,000
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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 costs
and expenses $ 3,106,000 $ 1,733,000
Income taxes payable 133,000 49,000
------------ ------------
3,239,000 1,782,000
------------ ------------
DEFERRED INCOME TAXES 3,017,000 2,314,000
EXCLUSIVE LICENSE OBLIGATION, less
current portion of $48,000 408,000 408,000
ASSET RETIREMENT OBLIGATION 211,000 -
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 3,916,000 8,209,000
Other comprehensive income 233,000 37,000
Treasury stock, at cost,
389,000 shares in 2003
and 398,000 shares in 2002 (734,000) (759,000)
------------ ------------
16,512,000 14,307,000
------------ ------------
$ 23,387,000 $ 18,811,000
============ ============
See accompanying notes.
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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
2003 2002 2003 2002
---------- ---------- ---------- ----------
REVENUES:
Oil and gas sales $5,014,000 $3,519,000 $1,980,000 $1,342,000
Operating 386,000 365,000 135,000 123,000
Investment income
and other 318,000 91,000 128,000 17,000
---------- ---------- ---------- ----------
5,718,000 3,975,000 2,243,000 1,482,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Oil and gas production 1,159,000 987,000 467,000 329,000
Depreciation, depletion
and amortization 930,000 911,000 325,000 353,000
General and administrative 939,000 742,000 333,000 257,000
Interest 34,000 38,000 11,000 13,000
---------- ---------- ---------- ----------
3,062,000 2,678,000 1,136,000 952,000
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES AND
ACCOUNTING CHANGE 2,656,000 1,297,000 1,107,000 530,000
INCOME TAXES (744,000) (389,000) (310,000) (159,000)
---------- ---------- ---------- ----------
INCOME BEFORE ACCOUNTING
CHANGE 1,912,000 908,000 797,000 371,000
CUMULATIVE EFFECT ON
PRIOR YEARS OF
SFAS 143-ACCOUNTING
FOR ASSET RETIREMENT
OBLIGATIONS (NET OF
TAXES OF $28,000) 72,000 - - -
---------- ---------- ---------- ----------
NET INCOME 1,984,000 908,000 797,000 371,000
RETAINED EARNINGS,
BEGINNING OF PERIOD 8,209,000 6,927,000 3,916,000 7,464,000
20% STOCK DIVIDEND (6,277,000) - - -
---------- ---------- ---------- ----------
RETAINED EARNINGS,
END OF PERIOD $3,916,000 $7,835,000 $3,916,000 $7,835,000
========== ========== ========== ==========
BASIC INCOME PER SHARE
BEFORE ACCOUNTING
CHANGE $ .48 $ .23 $ .20 $ .09
CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING
PRINCIPLE .02 - - -
------- ------- ------- -------
BASIC NET INCOME
PER SHARE $ .50 $ .23 $ .20 $ .09
======= ======= ======= =======
DILUTED INCOME PER SHARE
BEFORE ACCOUNTING CHANGE $ .48 $ .23 $ .20 $ .09
CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING
PRINCIPLE .02 - - -
------- ------- ------- -------
DILUTED NET INCOME
PER SHARE $ .50 $ .23 $ .20 $ .09
======= ======= ======= =======
See accompanying notes.
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CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Nine Months Ended
July 31,
-------------------------
2003 2002
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OPERATING ACTIVITIES:
Net income $ 1,984,000 $ 908,000
Adjustments to reconcile net income
to net cash provided
by operating activities:
Depreciation, depletion and amortization 930,000 911,000
Deferred income taxes 675,000 222,000
Cumulative effect of change in
accounting principle (72,000) -
Changes in operating assets and liabilities:
Proceeds from short term investments 2,353,000 3,965,000
Purchase of short term investments (1,760,000) (4,286,000)
Trade receivables (299,000) 113,000
Accrued oil and gas sales (262,000) (174,000)
Other 199,000 124,000
Accounts payable and accrued costs and expenses 435,000 484,000
Income tax payable 84,000 (36,000)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 4,267,000 2,005,000
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INVESTING ACTIVITIES:
Additions to oil and gas properties, net (3,296,000) (1,490,000)
Changes in other long-term assets (4,000) (55,000)
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NET CASH USED IN INVESTING ACTIVITIES (3,300,000) (1,545,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options
(9,600 options in 2003 and
75,000 options in 2002) 26,000 230,000
Purchase of treasury stock
(100 shares in 2003 and 4,400 in 2002) (1,000) (30,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,000 200,000
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 992,000 660,000
CASH AND CASH EQUIVALENTS:
Beginning of Period 1,324,000 819,000
----------- -----------
End of Period $ 2,316,000 $ 1,479,000
=========== ===========
Supplemental Cash Flow Information:
Cash paid (refunds received) for income taxes $ (16,000) $ 88,000
=========== ===========
See accompanying notes.
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CREDO PETROLEUM CORPORATION Management's
Discussion and Analysis of Financial Condition and Results of Operations July
31, 2003
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital and cash flow represent a significant capital
resource and source of liquidity. At July 31, 2003, working capital was
$6,130,000, compared to $6,630,000 at October 31, 2002. Cash flow from operating
activities before working capital changes totaled $3,517,000 for the nine
months, compared to $2,041,000 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 7% for the first nine months of fiscal
2003 compared to 2% 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.
The company's primary investment strategy involves market timing using U.S.
mutual funds. The New York Attorney General recently disclosed that he has
opened an investigation into whether some mutual funds companies are allowing
market timing in violation of representations in their offering materials. As a
result, management expects mutual funds companies to make market timing
increasingly difficult or to eliminate it altogether and is considering options
to redeploy a portion of the company's investments. The New York Attorney
General is also investigating possible "after hours" trading by
certain mutual fund companies and their customers. Although it is possible that
the investigation could expand to include some of the company's money managers,
management has no reason to believe that they have violated any after hours
trading laws.
Commitments for future capital expenditures were not material at July 31,
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 July 31, 2003, open natural gas hedge positions totaled 150 MMcf covering
the months of September through November 2003 at an average NYMEX price of $6.42
per Mcf. The August hedge was closed and a $84,000 deferred gain was realized.
The company had hedging gains of $49,000 for the quarter ended July 31, 2003 and
hedging losses of $388,000 for the nine months ended July 31, 2003. The company
has recorded in other comprehensive income net deferred gains of approximately
$323,000 ($233,000 net of tax) related to natural gas hedging transactions of
which $84,000 were realized and $239,000 were unrealized.
Subsequent to third quarter-end, an additional 120 MMcf was hedged for the
same three month period at an average NYMEX price of $5.34 per Mcf. Hedged
quantities for the months of September through November 2003 represent
approximately 77% of the company's estimated gas production for those months.
Hedges for the month of September 2003 have subsequently been closed resulting
in a gain of approximately $85,000.
The following table sets forth the components of Comprehensive Income for
each of the periods presented:
Nine Months Ended Three Months Ended
July 31, July 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Income $1,984,000 $ 908,000 $ 797,000 $ 371,000
Other comprehensive income,
net of tax:
Change in fair value
of futures contracts
used for natural gas
hedging 196,000 267,000 233,000 386,000
---------- ---------- ---------- ----------
Comprehensive income $2,180,000 $1,175,000 $1,030,000 $ 757,000
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Oil and gas sales volume and price comparisons for the indicated periods are set
forth below.
Nine Months Nine Months
Ended July 31, 2003 Ended July 31, 2002 Percent Percent
------------------- ------------------- Volume Price
Product Volume Price Volume Price Change Change
------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 987,300 $ 4.35(1) 1,002,500 $ 2.94(3) - 2% +48%
Oil (bbls) 25,900 $27.65 27,700 $20.54 - 7% +35%
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Three Months Three Months
Ended July 31, 2003 Ended July 31, 2002 Percent Percent
------------------- ------------------- Volume Price
Product Volume Price Volume Price Change Change
------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 349,300 $ 5.02(2) 382,200 $ 2.92(4) - 9% +72%
Oil (bbls) 8,600 $26.41 9,800 $23.27 -12% +13%
_____________________________
(1) Includes $0.40 Mcf hedging loss.
(2) Includes $0.14 Mcf hedging gain.
(3) Includes $0.35 Mcf hedging gain.
(4) Includes $0.05 Mcf hedging gain.
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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.
Anadarko Shelf Drilling Program. The company's drilling program centers on
its 14,000 gross acre Sand Creek Prospect and its 6,000 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. In total, 24 wells have been
drilled on the two prospects in the last two years, of which 19 were either
completed as producers or are awaiting completion.
The company recently drilled four new wells on the two prospects. One well is
producing, two are currently being completed for production, and one is a dry
hole.
The first of these wells, the 7,280-foot Gillenwaters #1-34, extended Morrow
production one mile north of the Wills #1-3. It was completed naturally (without
acid or fracture treatments) from one Morrow sand totaling 10 feet, and is a
very good well for the area. Pipeline sales commenced in early September and the
well is currently producing on a 15/64-inch choke at the daily rate of 1.10
million cubic feet of gas (MMcfg). The company is the operator and owns a 34%
working interest.
On the Sand Creek Prospect, the Derby #1-22 well was drilled about one mile
west of the Easterwood #11-23 (discussed below). The 7,450-foot well encountered
one Morrow sand totaling seven feet. The well tested good amounts of gas from a
"natural" completion and is currently awaiting pipeline connection
before being fracture stimulated. The company owns a 36% working interest and is
the operator.
The Glendena #2-5 well was drilled as a 2,700-foot south extension to the
Glendena #1-5 which, in October 2001, opened the recent drilling play in the
area. The 7,700-foot well encountered three Morrow sands totaling 28 feet that
calculate productive on logs. The lower eight-foot sand tested good amounts of
gas during "natural" completion testing. The well is connected to the
pipeline and the lower sand is scheduled to be fracture stimulated. The upper
two sands correlate to the prolific producing sands in the Glendena #1 and
Redfearn wells and will be opened for production after the lower sand is
stimulated. The company is the operator and owns a 39.5% working interest.
The Norman Trust #1-10 was the last of the four wells recently drilled on the
two prospects. The 7,850-foot well was a dry hole.
Elsewhere on the Sand Creek Prospect, the company has participated in
drilling five previously announced wells that are operated by third parties and
were classified as "tight holes". Two of the wells are now producing
and appear to be very good wells for the area. The other three well are
currently being completed for production.
On the northeast side of the Sand Creek Prospect, the Easterwood #11-23 well
discovered Morrow production approximately two miles to the north. It was
completed from one Morrow sand totaling 12 feet and was fracture stimulated.
Pipeline sales commenced in early August and the well is currently producing on
a 16/64-inch choke at the daily rate of 2.1 MMcfg. The company owns a 24%
working interest.
Five miles south of the Easterwood #11-23, the Deanna #1-15 discovered new
Morrow production on the southeast corner of the prospect. The 7,850-foot well
was completed naturally (without acid or fracture treatments) from one Morrow
sand totaling eight feet. Pipeline sales commenced in early August and the well
is currently producing on a 16/64-inch choke at the daily rate of
2.0 MMcfg and 35 barrels of condensate. The company owns a 37% working interest.
On the northwest side of the prospect, three new wells have been drilled. The
Daphne Jane #1-20 encountered two Chester zones totaling 22 feet which calculate
productive on logs. A drill stem test yielded gas at rates exceeding 5.0 MMcfg
per day. The operator is currently perforating and testing the lower Chester
zone and will test the primary zone shortly. The company owns a 12% working
interest.
The other two wells in which the company owns small interests, Blackstone
#1-8 (7%) and Patch #1-17 (12%) are currently being completed for production but
are expected to be marginal to below average wells.
Significant development drilling is continuing on the company's 1,280 gross
acre Traxler Prospect. The fourth well in the company's recent drilling program
was the Ronnie #1-6. The 7,700-foot well encountered two Chester zones totaling
27 feet that calculate productive on logs. It also encountered a Morrow sand
that appears to be productive. The lower Chester zone produces oil in the area
and the middle Chester and Morrow produce gas. The Ronnie is expected to be a
very good gas and oil well and is awaiting pipeline connection prior to being
completed for production. The company is the operator and owns a 60% working
interest.
Successful drilling is continuing in the South Fork Field located in Woods
County, Oklahoma. To date, the company has joined for its 7% in drilling 13
development wells in the field. Several additional wells are projected.
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.
The four Calliope systems installed earlier this year are currently producing
1.2 MMcfg (million cubic feet of gas) per day. The company estimates that they
have developed approximately 4.0 Bcfg (billion cubic feet of gas) of proved,
developed producing reserves. The company owns an average 73% working interest
and 60% net revenue interest in the wells.
The company is preparing to install Calliope systems on three additional wells
during the next few months. All of the wells are located in Oklahoma at depths
ranging from 8,200 to 8,700 feet. These wells are intended to demonstrate how
shallower wells can benefit from Calliope. The company owns approximately 75% of
each well.
The company has moved beyond prototype testing and is fortifying Calliope's
track record on a wide range of applications. With that in mind, this year the
company has installed Calliope on one marginal and three completely dead wells
ranging in depth from 11,100 to 18,400 feet. The results have been excellent
with a 100% success rate, average daily production of 300 Mcfg (thousand cubic
of gas) per well, and average developed reserves of 1.0 Bcfg per well.
Management's objective is to identify and execute the business plan that is
most likely to maximize Calliope's value. Accordingly, in addition to fortifying
Calliope's track record and finalizing a multimedia presentation about Calliope,
the company has recently commenced an independent marketing study which is
expected to be complete in four to six weeks.
STOCK DIVIDEND
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 nine month
periods ended July 31, 2003, the company recognized $3,000 and $7,000,
respectively, of accretion expense on the liability and a decrease of $13,000
and $30,000, 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:
Nine Months Ended Three Months Ended
July 31, July 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Income as reported $1,984,000 $ 908,000 $ 797,000 $ 371,000
Pro forma stock
compensation expense,
net of tax (263,000) (54,000) (239,000) (18,000)
---------- ---------- ---------- ----------
Pro forma net income $1,721,000 $ 854,000 $ 558,000 $ 353,000
========== ========== ========== ==========
Basic net income per share:
As reported $ 0.50 $ 0.23 $ 0.20 $ 0.09
======= ======= ======= =======
Pro forma $ 0.43 $ 0.22 $ 0.14 $ 0.08
======= ======= ======= =======
Diluted net income per share:
As reported $ 0.50 $ 0.23 $ 0.20 $ 0.09
======= ======= ======= =======
Pro forma $ 0.43 $ 0.22 $ 0.14 $ 0.09
======= ======= ======= =======
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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 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, 2003 Compared to Nine Months Ended July 31, 2002
For the nine months ended July 31, 2003, net income rose 118% to a record
$1,984,000 compared to $908,000 last year. Higher net income resulted primarily
from an increase in product prices.
Total revenues rose 44% to $5,718,000 compared to $3,975,000 last year. Oil
and gas sales rose 42% to $5,014,000 compared to $3,519,000 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 83% to $4.75 per Mcf
compared to $2.59 last year. Hedging transactions reduced nine month 2003 price
realizations by $.40 per Mcf, or 8%, compared to an increase of $.35 per Mcf, or
14%, last year. As a result, total natural gas price realizations were $4.35 per
Mcf compared to $2.94 last year. Net wellhead prices for oil rose 35% to $27.65
per barrel compared to $20.54 last year. The net effect of these price changes
and hedging transactions was to increase oil and gas sales $1,611,000. Volume
declines reduced oil and gas sales by $116,000. Operating income increased 6%
due to an increase in drilling and production overhead income from new operated
wells partially offset by the sale of several marginal operated wells.
Investment income and other rose to $318,000 compared to $91,000 last year due
to improved performance from market timers who manage the bulk of the company's
investments.
Total costs and expenses increased 14% to $3,062,000 in the first nine months of
fiscal 2003 compared to $2,678,000 last year. Oil and gas production expenses
rose 17%, or $172,000, due primarily to the additional operating costs
associated with production from new wells and Calliope installations.
Depreciation, depletion and amortization increased 2% primarily due to an
increase in the amortizable full cost pool base. General and administrative
expenses increased 27% 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.
Quarter Ended July 31, 2003 Compared to Quarter Ended July 31, 2002
For the quarter ended July 31, 2003, net income rose 115% to a record
$797,000 compared to $371,000 for the same quarter last year. Higher net income
resulted primarily from an increase in product prices.
Total revenues rose 51% to $2,243,000 compared to $1,482,000 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 70% to $4.88 per Mcf compared to $2.86 last year. Hedging transactions
increased third quarter price realizations $.14 per Mcf, or 3%, compared to an
increase of $.05, or 2%, last year. As a result, total natural gas price
realizations were $5.02 per Mcf compared to $2.92 last year. Net wellhead prices
for oil rose 13% to $26.41 per barrel compared to $23.27 last year. The net
effect of these price changes and hedging transactions was to increase oil and
gas sales $834,000. The effect of volume changes was a reduction in oil and gas
sales of $196,000. Operating income increased 10% due to increases in drilling
and production overhead income. Investment income and other rose to $128,000
compared to $17,000 last year due to improved performance from market timers who
manage the bulk of the company's investments.
Total costs and expenses increased 19% to $1,136,000 in the third quarter of
2003 compared to $952,000 last year. Oil and gas production expenses rose 42%,
or $138,000, due primarily to the additional operating costs associated with
production from new wells and Calliope installations. Depreciation, depletion
and amortization fell 8% due primarily to a decrease in production volumes
between the periods. General and administrative expenses increased $77,000, or
30%, 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.
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: September 15, 2003 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)
|
Exhibit 31.1
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
CERTIFICATIONS
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: September 15, 2003
/s/ James T. Huffman
-------------------------------
James T. Huffman
Chief Executive Officer
|
Exhibit 31.2
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
CERTIFICATIONS
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 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: September 15, 2003
/s/ James P. Garrett, Jr.
-------------------------------
James P. Garrett, Jr.
Vice President and
Chief Financial Officer
|
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
The undersigned, James T. Huffman, President and Chief Executive Officer of
CREDO Petroleum Corporation (the "Company"), has executed this
certification in connection with the filing with the Securities and Exchange
Commission of the Company's Quarterly Report on Form 10-QSB for the quarter
ended July 31, 2003 (the "Report").
The undersigned hereby certifies that:
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.
IN WITNESS WHEREOF, the undersigned has executed this certification as of the
15th day of September, 2003.
/s/ James T. Huffman
-----------------------------
James T. Huffman
President and
Chief Executive Officer
|
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
The undersigned, James P. Garrett, Jr., Vice President and Chief Financial
Officer of CREDO Petroleum Corporation (the "Company"), has executed
this certification in connection with the filing with the Securities and
Exchange Commission of the Company's Quarterly Report on Form 10-QSB for the
quarter ended July 31, 2003 (the "Report").
The undersigned hereby certifies that:
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.
IN WITNESS WHEREOF, the undersigned has executed this certification as of the
15th day of September, 2003.
/s/ James P. Garrett, Jr.
-----------------------------
James P. Garrett, Jr.
Vice President and
Chief Financial Officer
|
End
of Filing |
