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| “200 Best Small Companies”
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“100 Fastest Growing Small Companies”
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“Profitability Per Unit of Production”
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| (Forbes Magazine)
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(Fortune Small Business Magazine)
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Worldwide Oil and Gas (John S. Herold, Inc.)
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| 14th in 2004
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47th in 2004
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10th in 2004
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| 89th in 2001
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47th in 2003
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14th in 2003
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8th in 2002
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| Our performance
has also been very strong when compared to our U.S. industry group (source: John
S. Herold, Inc.).
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CREDO
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Oil and Gas Industry-U.S.
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4-year average production increase
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29%
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3%
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4-year average reserve increase
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21%
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5%
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4-year average stock price appreciation
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96%
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5%
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3-year production replacement
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245%
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127%
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3-year finding and development costs (BOE)
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$ 5.88
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$ 9.78
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2003 net income per BOE
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$ 12.17
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$ 8.31
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“The unique synergy between our two core projects—drilling and
Calliope—provides
both rapid production growth and long-lived reserves at a
reasonable cost and risk.”
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We have an extraordinary team of creative people who
are masters of their disciplines and who treat this company as if it is their
own. Your management and board of directors own almost 25 percent of the
company, putting their interest in line with yours. If you lose, we lose more.
Our success is derived through a rigorous application of science that is
focused on “creating” value where none previously existed. We have accomplished
this in two ways—through the drill bit and with technological advances such as
Calliope. These two synergistic core projects offer a superb, and possibly
unique, formula for achieving our goal of providing production growth and adding
long-lived gas reserves at a reasonable cost and risk.
We do not manage CREDO as
a “boom or bust” commodity play, and we are not encumbered by short-term
performance pressures. That gives us the managerial freedom to focus on
fundamentals and to take a long-term view, a somewhat rare opportunity in
today’s public company world.
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“Capital spending was by far the highest in
company history as we plowed all of our cash
flow back into the business. The
result was another year of record operational results.”
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Capital spending
increased 30 percent to $7,089,000, by far the highest level in company history.
We added 3.6 Bcfe of new proved reserves, yielding 183 percent production
replacement. At year-end, proved reserves totaled 17.7 Bcfe with natural gas
representing 86 percent of reserve volumes.
Successful drilling continued to be
the engine behind the sharp increases in our production and cash flow. However,
Calliope is the engine that provides stable, long-lived reserves at a moderate
cost and low risk. Calliope and drilling are a very synergistic combination, as
our performance statistics show.
Calliope’s impressive track record clearly
demonstrates its operational flexibility and economic viability. Our average
Calliope well, excluding prototypes, ranks in the top 15 percent of all U. S.
onshore producing wells with reserves of 1.10 Bcfe and initial production of 270
Mcfe per day. In 2004, we significantly expanded Calliope’s operating breadth,
including successful installation inside 2-3/8-inch tubing set on packers.
Our
drilling struggled a bit this year with more dry holes and marginal wells than
usual. This is not uncommon, as our area often produces uneven drilling results.
But we persevered and good things finally happened, albeit some too late to be
included in 2004 results. The Gage Prospect discovery, just prior to year-end,
and the Glacier Prospect discovery, just after year-end, are very promising and
should provide a significant boost to our 2005 production. CREDO has been
steadily increasing the percentage it retains in its drilling prospects and owns
50 percent of Gage Prospect and 70 percent of Glacier Prospect.
Our finding cost
was $1.98 per Mcfe, up considerably from $.86 last year. A higher than usual
number of dry holes and several prototype Calliope applications contributed to
the increase, along with rapidly escalating field costs. Despite the increase,
our 2004 finding cost is in line with last year’s U. S. industry group average
of $1.63, and remains substantially below last year’s small company peer group
average of $2.87.
It is noteworthy that CREDO has a long history of low finding
costs compared to our industry group. In fact, our finding costs have
historically ranked in the best quartile of U.S. companies. For the three years
ending in 2003, CREDO had the 14th lowest finding costs among U.S. oil and gas
companies (John S. Herold, Inc.). I expect our long-term track record to remain
intact.
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“Natural gas prices are the single most important driver of our
financial performance.
Accordingly, we have a long-standing and well publicized
policy of actively
managing this most critical element of our business.”
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In all
aspects of our business, we must be right about two things—the fundamentals and
the timing. In hedging a portion of CREDO’s production last year, I was right
about the fundamentals, as there was ample gas available, but my timing was off,
as the bulls owned the market. The result was that hedging deprived our bottom
line of about $500,000.
Two Hedging plays an important role in maintaining the
consistent long-term performance that creates confidence and credibility with
all of our constituencies. For example, hedging has provided good cash flow in
periods when prices were low (such as 2001 and 2002), giving us the ability to
maintain our operating momentum when others were constrained by low prices. The
fact that CREDO has made money hedging over the long-term is just icing on the
cake.
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“I expect 2005 to be a very important year for CREDO as we launch our
Calliope joint venturing effort and expand our drilling into south Texas.”
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Our
Calliope team has done a remarkable job of inventing, patenting and refining
Calliope and then building an impressive track record with installations on
CREDO-owned wells. The project's next phase is to ramp-up our number of Calliope
installations by joint venturing with larger companies. We recently launched
this phase which has been in planning for several years. To spearhead the
effort, we added two highly qualified people. Both had very successful careers
in operations and high-level management with major companies. We are delighted
that they share our enthusiasm for Calliope, and we have provided them the
incentive of an ownership share in the results they produce.
The pace of this
next stage of Calliope’s roll-out is measured as we carefully select both
partners and wells. Initial Calliope joint venture presentations have been made
to a limited number of companies, all of which have expressed a keen interest in
the technology.
We will continue to drill on our 40,000 gross acres in the
Northern Anadarko Basin of Oklahoma. This acreage has excellent potential for
more good discoveries as our recent Gage and Glacier Prospect discoveries
demonstrate.
We are expanding into a new area and a new type of play. Effective
January 1st, we committed to an exploration program using 3-D seismic to define
the Vicksburg and Frio Sands in Hidalgo, Jim Hogg and Starr Counties located in
south Texas. CREDO will contribute a minimum $1,500,000 to the project over two
years, largely for 3-D seismic acquisition and interpretation and lease
acquisition. Drilling costs will be determined as prospects are generated. Given
the up-front time required to reprocess seismic and purchase leases, I do not
expect wells to spud until next year.
Similar to our Anadarko Shelf team, the
south Texas exploration team has many years of experience and a successful
exploration track record in the region. In addition, two of our directors have
extensive knowledge of drilling and operations in south Texas.
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“I am looking
forward to 2005 because our core business is
thriving and important new
opportunities are at hand.”
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It is my job, and that of our directors, to ensure
we have projects in the pipeline that provide good growth potential. We have met
the challenge to successfully expand our business in a manner that has produced
top quartile performance on a host of metrics over the long-term. And we have
done so without losing sight of the fundamentals that brought us to this point.
I am confident that the essential elements are in place to sustain our growth,
and I expect 2005 to be another good year which will add to our record of
excellence.
James T. Huffman
President
January 14, 2005
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