NEWS RELEASE
| FOR IMMEDIATE RELEASE |
CREDO PETROLEUM REPORTS FIRST HALF 2009 RESULTS
Continued Natural Gas Price Decline Triggers Additional Non-Cash Write-Down of Oil and Gas Property Costs
New Discoveries Increase Second Quarter Oil Production by 184%
DENVER, COLORADO, June 9, 2009 - CREDO Petroleum Corporation (NASDAQ: CRED) today reported financial results for the first six months and quarter ended April 30, 2009.
For the first six months of 2009, Credo reported a net loss of $14,601,000, or $1.41 per basic share, reflecting a $15,038,000 after tax, non-cash write-down to reduce the book carrying value of oil and gas properties and long lived assets. Last year, first half net income was $693,000, or $0.07 per basic share. Lower product prices caused revenue to fall 49% to $4,461,000 for the first half compared to $8,675,000 last year. Working capital increased 35% to $14,255,000 compared to $10,569,000 last year.
For the second quarter ended April 30, 2009, the company reported a net loss of $4,710,000, or $.46 per basic share, reflecting an additional $4,898,000, after tax, non-cash write-down to reduce the book carrying value of oil and gas properties. Last year, the company reported a second quarter net loss of $880,000, or $.09 per basic share due to hedging losses. Lower product prices caused revenue to fall 52% to $2,353,000 for the second quarter compared to $4,942,000 last year.
James T. Huffman, CEO, stated, "An asset write-down is required if the net book value of the company's oil and gas properties exceeds a ceiling which is based primarily on reserves valued at spot prices on the last day of a quarter. At the end of our first quarter, the spot price for natural gas of $3.33 per Mcf triggered such a write-down. Subsequently, at our second quarter end, the spot price of natural gas fell another 15% to $2.83, triggering an additional write-down. April natural gas prices fell back to 2000 levels as the current recession caused a significant decline in industrial demand.
"It is important for shareholders to understand that the write-downs in book asset values resulted primarily from accounting rules that require "point in time" valuation of oil and gas reserves on the last day of the quarter using spot market prices in effect on that date. That price is not necessarily reflective of the contract prices Credo received for its oil and gas, or the prices that Credo expects to receive in the future. The write-down is purely a non-cash financial statement adjustment and does not impact future cash flows or oil and gas reserve quantities.
Huffman further stated, "The requirement to write-down assets based on prices at a single point in time during a severe recession is repugnant to me because I do not believe that the valuations reflect the long term value of our business. However, in perspective, the first half loss equates to less than two and one half years' historical earnings and should be recaptured in the future through lower charges to DD&A.
"I have previously reported that our cost of doing business increased dramatically as oil and gas prices rose to historic highs over the past few years. That was reflected in the asset values recorded on Credo's books. Therefore, although it is unpleasant, it is not unexpected that an approximate 75% drop in natural gas prices and 63% drop in oil prices from their highs last July would cause book values to exceed market-based reserve valuations, thus requiring a write-down. This has occurred one other year in Credo's 30-year history. That write-down was made in 1986 after oil and gas prices fell about 50% in a short period of time. There is, however, a silver lining to asset write-downs because they lower future DD&A expense to the benefit of future earnings."
OIL PRODUCTION SETS NEW RECORD; BALANCE BETWEEN OIL AND GAS PRODUCTION SIGNIFICANTLY IMPROVES
Recent new discoveries resulted in oil production setting new records for both the first half and the second quarter. Oil production increased 89% in the first half and 184% in the second quarter.
"Historically, Credo's reserves and production have been heavily weighted to natural gas," Huffman said. "Several years ago, we announced plans to achieve better balance between oil and natural gas based on the belief that increasing worldwide demand would pressure oil supplies and prices. That scenario is reflected in today's oil prices where a barrel of oil currently trades at a 15 to 18 multiple over an Mcf of natural gas. By comparison, the Btu equivalent of a barrel of oil to an Mcf of natural gas is only six to one.
"Our success in achieving better production balance is reflected in Credo's second quarter 2009 results. On a volume-equivalent basis, oil provided 45% of total production quantities in the second quarter compared to 16% last year. In addition, the impact of new oil discoveries on revenues was even greater with oil providing 64% of total oil and gas revenues compared to only 27% last year.
"Last year we elected to postpone certain scheduled drilling due to the historically high costs of equipment and field services. That decision came with the consequence that less drilling would cause production to decline. Our goal this year has been to make up that production decline with new oil production. That goal was achieved in the second quarter. Looking at the balance of 2009 and beyond, we expect new oil discoveries to generate significant additional reserves and production which will support strong operating cash flow."
For the first half of 2009, oil production rose 89% to 54,800 barrels compared to 29,100 barrels last year. Natural gas production fell 21% to 647 MMcf (million cubic feet) compared to 825 MMcf last year. For the six months, increased oil production virtually offset the decline in natural gas production, and total first half production, denominated in equivalent Mcfs, fell only 2% to 976 MMcfe (million cubic feet gas-equivalent) compared to 1,000 MMcfe last year. Production would have increased 8.5% if oil were converted to natural gas based on the wellhead prices actually received by the company during the periods.
For the second quarter of 2009, increased oil production fully offset the decline in natural gas production. Oil production rose 184% to 38,100 barrels compared to 13,400 barrels last year. Second quarter natural gas production fell 34% to 285 MMcf compared to 433 MMcf last year. Total second quarter production, denominated in equivalent Mcfs, was approximately 514 MMcfe both years. Production would have increased 28.6%, if oil were converted to natural gas based on the wellhead prices actually received by the company during the periods.
WELLHEAD PRICES FALL 53% COMPARED TO LAST YEAR
For the first half of 2009, net wellhead natural gas prices fell 50% to $3.62 per Mcf compared to $7.28 last year. Realized hedging transactions increased wellhead prices $3.51 per Mcf this year compared to $1.03 last year. As a result, the company's total natural gas price realizations fell 14% to $7.13 per Mcf compared to $8.31 last year. Wellhead oil prices fell 58% to $38.63 per barrel compared to $91.87 last year. There were no oil hedging transactions in 2009 or 2008.
Net wellhead natural gas prices for the second quarter fell 64% to $3.01 per Mcf compared to $8.36 last year. Realized hedging transactions increased wellhead prices $4.74 per Mcf this year compared to $0.01 last year. As a result, the company's total natural gas price realizations fell 7% to $7.75 per Mcf compared to $8.37 last year. Wellhead oil prices fell 60% to $39.25 per barrel compared to $98.25 last year. There were no oil hedging transactions in 2009 or 2008.
At April 30, 2009, open hedging derivative contracts covered 300,000 MMbtus at NYMEX prices ranging from $8.04 to $8.41, and covered all production months from May 2009 through October 2009. Subsequent to April 30, 2009, the May and June contracts expired and the company realized hedging gains of $468,000 on those contracts. Hedging derivative contracts subsequent to April 30, 2009 are estimated to be approximately 50% of the company's estimated monthly production. All open hedge contracts are indexed to the NYMEX. Average prices in the company's primary market are expected to be 15% to 17% below NYMEX prices due to basis differentials and transportation costs.
STRONG FINANCIAL CONDITION CONTINUES TO PROVIDE A SOLID FOUNDATION FOR GROWTH
Capital spending for oil and gas drilling activities the first half of 2009 totaled $6,579,000. In addition, the company paid $1,812,000 to purchase acreage in the North Dakota portion of the horizontal Bakken oil play, and it purchased all of the underlying patents related to the Calliope Gas Recovery System for $4,400,000. Credo previously owned an exclusive license to the Calliope patents and the related technology. However, it purchased the underlying patents in order to establish absolute control over the technology and to eliminate future costs for individual well licenses. The acquisition also covered a series of exciting new patents, known as Tractor Seal, that is specifically designed to remove liquids from shallow wells more efficiently than existing technologies. If perfected, this new technology will be an excellent complement to Calliope's focus on deeper wells.
At April 30, 2009, working capital was $14,255,000. Total assets were $51,801,000 including cash and short-term investments of $12,239,000. At second quarter-end, stockholders' equity was $46,474,000, and the company had no long-term debt.
MANAGEMENT COMMENT
"When the price of our production falls over 50% in a short period of time, it makes for a very tough year," Huffman said. "Fortunately, we began considering the possibility of a significant energy price correction last summer and prepared Credo to withstand substantially lower product prices and difficult financial markets. Credo is now well positioned in a distressed environment just as we were back in 1986 when we acquired the assets that are now the backbone of our business.
"Credo currently owns about 150,000 gross acres in the Central Kansas Uplift 3-D seismic play. With oil prices showing renewed strength, we are ramping-up in Kansas and expect to drill two to four wells per month for the balance of the year. We recently completed shooting seismic over about 100 square miles along the Central Kansas Uplift, and our initial interpretation shows many potential drilling locations in 11 separate prospect areas. We are also excited about the potential for the Bakken play in North Dakota where Credo owns about 5,000 gross acres. We expect to begin drilling this summer in what has become the number one oil resource play in the U.S.
"We are continuing to focus on our Calliope technology, and we are beginning to see more Calliope opportunities as a result of lower natural gas prices. Our primary objective is for Credo to purchase candidate wells and install Calliope. However, we are also discussing joint ventures with several companies and believe that we are seeing renewed interest as companies cut drilling budgets and focus more on lower cost remedial work."
* * * * *
Contact: James
T. Huffman
Chief Executive Officer
or
Alford B. Neely
Chief Financial Officer
303-297-2200
Website: www.credopetroleum.com
Credo Petroleum Corporation is a publicly traded independent energy company headquartered in Denver, Colorado. The company is engaged in the exploration for and the acquisition, development and marketing of natural gas and crude oil in the Mid-Continent and Rocky Mountain regions. The company's stock is traded on the NASDAQ System under the symbol "CRED" and is quoted daily in the "NASDAQ Global Market" section of The Wall Street Journal.
This press release includes certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included in this press release, other than statements of historical facts, address matters that the company reasonably expects, believes or anticipates will or may occur in the future. Such statements are subject to various assumptions, risks and uncertainties, many of which are beyond the control of the company. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those described in the forward-looking statements. Investors are encouraged to read the "Forward-Looking Statements" and "Risk Factors" sections included in the company's Annual Report on Form 10-K for more information. Although the company may from time to time voluntarily update its prior forward looking statements, it disclaims any commitment to do so except as required by securities laws.
CREDO PETROLEUM CORPORATION
FINANCIAL HIGHLIGHTS
Condensed Operating Information
Six Months Ended Three Months Ended
April 30, April 30,
2009 2008 2009 2008
REVENUES:
Oil sales $ 2,118,000 $ 2,671,000 $ 1,496,000 $ 1,319,000
Natural gas 2,343,000 6,004,000 857,000 3,623,000
sales
4,461,000 8,675,000 2,353,000 4,942,000
EXPENSES:
Oil and gas 1,623,000 1,838,000 737,000 986,000
production
Depreciation,
depletion and 2,540,000 1,751,000 1,203,000 898,000
amortization
Impairment of
oil and gas
properties and
long lived 24,652,000 - 8,030,000 -
assets
General and 1,389,000 697,000 521,000 365,000
administrative
30,204,000 4,286,000 10,491,000 2,249,000
Income (Loss)
from (25,743,000) 4,389,000 (8,138,000) 2,693,000
Operations
Other Income
and (Expense)
Realized and
unrealized
gains (losses)
from
derivative 1,927,000 (3,472,000) 461,000 (4,003,000)
contracts
Investment and
other income (120,000) 71,000 22,000 77,000
(loss)
1,807,000 (3,401,000) 483,000 (3,926,000)
INCOME(LOSS)
BEFORE INCOME
TAXES (23,936,000) 988,000 (7,655,000) (1,233,000)
INCOME TAXES 9,335,000 (295,000) 2,945,000 353,000
NET INCOME $ (14,601,000) $ 693,000 $ (4,710,000) $ (880,000)
(LOSS)
Basic income
(loss) per $ (1.41) $ 0.07 $ (0.46) $ (0.09)
share
Diluted income
(loss) per $ (1.41) $ 0.07 $ (0.46) $ (0.09)
share
Weighted
average number
of shares of
Common Stock
and dilutive
securities:
Basic 10,358,000 9,299,000 10,330,000 9,302,000
Diluted 10,358,000 9,363,000 10,330,000 9,302,000
CREDO PETROLEUM CORPORATION
FINANCIAL HIGHLIGHTS
Condensed Balance Sheet Information April 30, 2009 October 31, 2008
Cash and Short-Term Investments $ 12,239,000 $ 25,376,000
Other Current Assets 4,209,000 4,678,000
Oil and Natural Gas Properties, Net 28,847,000 46,456,000
Intangible Assets, Net 4,310,000 1,079,000
Other Assets 2,196,000 2,971,000
$ 51,801,000 $ 80,560,000
Current Liabilities $ 2,193,000 $ 5,894,000
Deferred Income Taxes 1,732,000 11,117,000
Asset Retirement Obligations 1,402,000 1,338,000
Stockholders' Equity 46,474,000 62,211,000
$ 51,801,000 $ 80,560,000
©2000-2009 CREDO Petroleum Corporation. All rights
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