Fellow Shareholders:

 

 

            Once again I am pleased to report that we had an excellent year.  New records were established this year in almost all operating and financial categories, highlighted by an 18 percent return on equity without using leverage.  This is the fifth consecutive year that Credo has generated record financial results, and the fourteenth consecutive year of record reserves.

 

            I am also pleased to report that we have made good progress on the Calliope joint venture front, and that we have some exciting drilling opportunities on the immediate horizon.  If these projects realize their potential, the result will generate significant value for our shareholders.

 

            Our straightforward goals are grounded on properly managing our costs and risks:

 

·         Earn a profit that will provide an excellent

      return on our shareholders’ investment

·         Increase production volumes

·         Replace produced reserves and

      increase the reserve base

 

            In addition to making a record profit, we replaced 189 percent of this year’s oil and natural gas production.  Our 2007 capital investment of $8,834,000 generated proved reserves totaling 220,000 barrels of oil and 2.9 billion cubic feet of gas.  Our reserve replacement cost was a low $1.68 per thousand cubic of gas equivalent, excluding the cost of undeveloped properties.  Our 2007 finding cost is lower than last year which is a significant achievement in view of the rapidly rising cost of field services.

 

            We did not achieve our production goal because of the timing of two exceptionally high rate discoveries last year.  Flush production from those discoveries caused prior year production to increase 18%, which was more than we could overcome this year.  The table below shows our five year compound average growth rate for production and certain other critical financial and operating categories.

 

                                                                                    Five Year CAGR

 

·         Production increase                  8%

·         Reserve increase                   12%

·         Revenue increase                   28%

·         Net income increase               39%

 

            Credo’s shareholder returns are among the top of U.S. public companies with almost a 300 percent five year gain and an 800 percent ten year gain.  Despite this year’s record performance and our consistent long-term growth, our stock price ended the year significantly lower than last year’s close.  As Credo’s largest shareholder, that is particularly disappointing to me because I do not believe that the stock price properly reflects Credo’s current underlying value.  We have seen cycles like this before, and I am certain that Credo’s stock will adjust accordingly as our staff continues to manage a strong asset base with our successful and time tested business strategy.

 

            Once again in 2007, we did a substantial amount of natural gas price hedging.  Because gas prices have an enormous impact on our financial performance, we have a long-standing policy of actively managing prices through hedging.  This plays an important role in maintaining the consistent long‑term performance that creates confidence and credibility with all of our constituencies.

            Business Strategy.  We have an excellent portfolio of assets, and our people are executing a consistent and well designed strategy that has produced outstanding long term results.  Our business focuses on two core strategies:  application of our patented Calliope technology and conventional drilling.  These two strategies are very synergistic and both have contributed significantly to the consistent achievement of our goals.  We have also received the initial patent on another new fluid lift technology that has very broad application for shallow wells.  We expect to begin field testing the new system this summer.

 

            Calliope Gas Recovery System.  I am pleased to report that we have recently completed two new Calliope joint venture agreements.  One agreement provides for a substantial license fee based on meeting a specified future performance threshold.  The other provides for Credo to share in up to 50 percent of the Calliope production from what I anticipate will be a significant number of wells.

 

            The recent joint ventures are a direct result of the new approach we implemented this year in response to obstacles that we have encountered.  Despite initial enthusiasm for Calliope, we often see project proposals get delayed or suspended in the numerous layers of review and approval that are required by large companies. 

 

            To address that problem, we developed a new and interactive way to present Calliope that can be easily tailored to the needs of the audience.  Our new presentation allows us to efficiently inform people of all disciplines and at all levels within large organizations about how Calliope works and its impressive track record.

 

            We compiled empirical data for the new presentation that shows the advantages of using Calliope early in a well’s life as a single step solution to liquid loading problems.  We have also developed data that clearly demonstrates how Calliope has created a significant production advantage over other wells in the same reservoir.  I recommend our December 2, 2007 press release for your review and consideration because it contains very detailed information about Calliope’s track record.

 

            The data shows that Calliope has created almost $100,000,000 of gross value at today’s natural gas prices from a group of 14 wells that were previously dead or uneconomic.  These are the non-experimental, “go forward” applications that represent a wide variety of Calliope options which can be readily applied to other wells. 

 

            With Calliope installed, the 14 wells have already produced an incremental 3.4 billion cubic feet of gas, worth about $23,000,000 at today’s gas prices.  The wells are still highly profitable, producing about 60.0 million cubic feet of gas per month worth over $5,000,000 per year.  Total ultimate Calliope reserves of about 14.0 billion cubic feet of gas were estimated for these wells. 

 

            Calliope added those reserves at a finding cost of only $0.41 per thousand cubit feet.  That is an extremely low finding cost, particularly when compared to the industry-wide finding cost last year of over $3.00.  The “all in” Calliope cost, which includes the costs to produce and sell the gas, is only $1.02 per thousand cubic feet. 

 

            This economic result on “down and out” wells is nothing short of remarkable, and the performance of the wells is a testament to how Calliope can add new domestic reserves in the face of rising demand for foreign energy.

 

            One of the 14 wells, the J.C. Carroll, had been dead for five years when Calliope was installed.  Previous operators had exhausted the other fluid lift options before Credo purchased the well.  We installed Calliope and the well immediately came back to life producing at the rate of 20 million cubic feet of gas per month.  With Calliope, the previously dead Carroll well has already produced over 1.0 billion cubic feet of Calliope gas, and it is expected to ultimately produce between 1.5 and 1.7 billion cubic feet of Calliope gas reserves.

 

            We have proven beyond any doubt that Calliope will perform as advertised.  We are now working at various levels with interested companies, and I am optimistic that additional joint ventures will result from the discussions.  I am also confident that, as we bring Calliope into large companies, it will generate a lot of enthusiasm as word spreads about Calliope’s performance and outstanding economics.