________________________________________________________________
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 April 30, 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)
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 May 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 April 30, 2003
________________________________________________________________
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets
As of April 30, 2003 (Unaudited) and October 31, 2002
Consolidated Statements of Earnings and Changes in Retained
Earnings (Unaudited)
For the Six and Three Month Periods Ended April 30, 2003
and 2002
Consolidated Statements of Cash Flows (Unaudited)
For the Six Month Periods Ended April 30, 2003 and 2002
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Certifications
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on
March 13, 2003. The following matters, as described more fully
in the company's Proxy Statement, were approved by the
shareholders:
(1) The following Class II nominees for director were elected:
For Withhold
--- --------
Clarence H. Brown 2,789,063 6,519
James T. Huffman 2,717,719 77,863
(2) Hein + Associates LLP was approved as the independent
auditors of the Company for the fiscal year 2003. The
shareholders voted 2,776,973 for and 2,560 against this
appointment, with 16,049 abstentions.
There were 484,542 non-votes for each matter voted upon.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification by Chief Executive Officer under
Section 906 of the Sarbanes-Oxley Act
(18 U.S.C. Section 1350)
99.2 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
No current reports on Form 8-K were filed during the
reporting quarter.
____________________________________________
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
April 30, October 31,
2003 2002
------------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,662,000 $ 1,324,000
Short term investments 5,258,000 5,586,000
Receivables:
Trade 569,000 577,000
Accrued oil and gas sales 849,000 535,000
Other 202,000 390,000
------------ ------------
8,540,000 8,412,000
------------ ------------
OIL AND GAS PROPERTIES, net,
using full cost method:
Unevaluated 2,495,000 1,690,000
Evaluated 9,500,000 7,987,000
------------ ------------
11,995,000 9,677,000
------------ ------------
EXCLUSIVE LICENSE AGREEMENT,
net of accumulated amortization
of $187,000 in 2003 and
$152,000 in 2002 513,000 548,000
OTHER, net 145,000 174,000
------------ ------------
$ 21,193,000 $ 18,811,000
============ ============
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 $ 2,239,000 $ 1,733,000
Income taxes payable 43,000 49,000
------------ ------------
2,282,000 1,782,000
------------ ------------
DEFERRED INCOME TAXES 2,848,000 2,314,000
EXCLUSIVE LICENSE OBLIGATION,
less current portion of $48,000 408,000 408,000
ASSET RETIREMENT OBLIGATION 199,000 -
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 3,119,000 8,209,000
Other comprehensive income - 37,000
Treasury stock, at cost,
399,000 shares in 2003 and
398,000 shares in 2002 (760,000) (759,000)
------------ ------------
15,456,000 14,307,000
------------ ------------
$ 21,193,000 $ 18,811,000
============ ============
See accompanying notes.
CREDO PETROLEUM CORPORATION
Consolidated Statements of Earnings And Changes in
Retained Earnings - Unaudited
Six Months Six Months Quarter Quarter
Ended Ended Ended Ended
April 30 April 30 April 30 April 30
2003 2002 2003 2002
---------- ---------- ---------- ----------
REVENUES:
Oil and gas sales $3,034,000 $2,177,000 $1,445,000 $1,131,000
Operating 251,000 242,000 125,000 116,000
Investment income
and other 190,000 74,000 114,000 65,000
---------- ---------- ---------- ----------
3,475,000 2,493,000 1,684,000 1,312,000
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Oil and gas
production 692,000 658,000 365,000 298,000
Depreciation,
depletion and
amortization 605,000 558,000 282,000 292,000
General and
administrative 606,000 485,000 328,000 242,000
Interest 23,000 25,000 12,000 13,000
---------- ---------- ---------- ----------
1,926,000 1,726,000 987,000 845,000
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES AND
ACCOUNTING CHANGE 1,549,000 767,000 697,000 467,000
INCOME TAXES (434,000) (230,000) (195,000) (140,000)
---------- ---------- ---------- ----------
INCOME BEFORE
ACCOUNTING CHANGE 1,115,000 537,000 502,000 327,000
CUMULATIVE EFFECT ON
PRIOR YEARS OF
SFAS 143-ACCOUNTING
FOR ASSET RETIREMENT
OBLIGATIONS (NET OF
TAXES OF $28,000) 72,000 - - -
---------- ---------- ---------- ----------
NET INCOME 1,187,000 537,000 502,000 327,000
RETAINED EARNINGS,
BEGINNING OF PERIOD 8,209,000 6,927,000 8,894,000 7,137,000
20% STOCK DIVIDEND (6,277,000) - (6,277,000) -
---------- ---------- ---------- ----------
RETAINED EARNINGS,
END OF PERIOD $3,119,000 $7,464,000 $3,119,000 $7,464,000
========== ========== ========== ==========
BASIC INCOME PER
SHARE BEFORE
ACCOUNTING CHANGE $ .28 $ .14 $ .13 $ .08
CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING
PRINCIPLE .02 - - -
------ ------ ------ ------
BASIC NET INCOME
PER SHARE $ .30 $ .14 $ .13 $ .08
====== ====== ====== ======
DILUTED INCOME PER SHARE
BEFORE ACCOUNTING CHANGE $ .28 $ .14 $ .13 $ .08
CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING
PRINCIPLE .02 - - -
------ ------ ------ ------
DILUTED NET INCOME
PER SHARE $ .30 $ .14 $ .13 $ .08
====== ====== ====== ======
See accompanying notes.
CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Six Months Ended
April 30,
--------------------------
2003 2002
----------- ------------
OPERATING ACTIVITIES:
Net income $ 1,187,000 $ 537,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and amortization 605,000 558,000
Deferred income taxes 506,000 95,000
Cumulative effect on change in accounting
principle (72,000) -
Changes in operating assets and liabilities:
Proceeds from short term investments 1,046,000 3,276,000
Purchase of short term investments (718,000) (3,710,000)
Trade receivables 8,000 54,000
Accrued oil and gas sales (314,000) (107,000)
Other 151,000 45,000
Accounts payable 506,000 92,000
Income tax payable (6,000) (84,000)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,899,000 756,000
----------- ------------
INVESTING ACTIVITIES:
Additions to oil and gas properties, net (2,569,000) (709,000)
Changes in other long-term assets 9,000 (48,000)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (2,560,000) (757,000)
----------- ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options
(75,000 options in 2002) - 145,000
Purchase of treasury stock
(100 shares in 2003 and 4,400 in 2002) (1,000) (25,000)
----------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,000) 120,000
----------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS 338,000 119,000
CASH AND CASH EQUIVALENTS:
Beginning of Period 1,324,000 819,000
----------- ------------
End of Period $ 1,662,000 $ 938,000
=========== ============
Supplemental Cash Flow Information:
Cash paid for income taxes $ - $ 50,000
=========== ============
See accompanying notes.
CREDO PETROLEUM CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
April 30, 2003
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital and cash flow represent a
significant capital resource and source of liquidity. At April
30, 2003, working capital was $6,258,000, compared to $6,630,000
at October 31, 2002. Cash flow from operating activities before
working capital changes totaled $2,226,000 for the six months,
compared to $1,190,000 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 4% for the first half of fiscal 2003 compared to 1%
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.
Commitments for future capital expenditures were not
material at April 30, 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 had a futures market net loss of $548,000 in the
second quarter resulting primarily from the closing of the March
2003 natural gas hedge position of 110 MMcf at a loss of
$558,000, or $5.07 per Mcf. The futures market net loss was
substantially offset by the March 2003 Index cash price of
approximately $8.50 in the market areas to which the hedge
related.
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 April 30, 2003, there were no open natural gas
hedge positions.
Subsequent to April 30, 2003, the company hedged
approximately 50% of its expected production, or 250 MMcf, for
the months of July through November 2003 at an average NYMEX
price of $6.39 per Mcf. The company expects average gas prices
in its market areas to be 15% to 17% below NYMEX prices due to
basis differentials and transportation costs.
The following table sets forth the components of
Comprehensive Income for each of the periods presented:
Six Months Ended Three Months Ended
April 30, April 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net Income $ 1,187,000 $ 537,000 $ 502,000 $ 327,000
Other comprehensive
income, net of tax:
Change in fair
value of futures
contracts used for
natural gas
hedging (37,000) (119,000) 113,000 (306,000)
----------- ----------- ----------- -----------
Comprehensive income $ 1,150,000 $ 418,000 $ 615,000 $ 21,000
=========== =========== =========== ===========
Oil and gas sales volume and price comparisons for the
indicated periods are set forth below.
Six Months Six Months Percent Percent
Ended April 30, 2003 Ended April 30, 2002 Volume Price
-------------------- --------------------
Product Volume Price Volume Price Change Change
------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 630,700 $ 4.04(1) 620,200 $ 2.96(3) + 2% +36%
Oil (bbls) 17,300 $28.27 17,900 $19.06 - 4% +48%
Three Months Three Months Percent Percent
Ended April 30, 2003 Ended April 30, 2002 Volume Price
-------------------- --------------------
Product Volume Price Volume Price Change Change
------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 317,700 $ 3.77(2) 329,600 $ 2.90(4) - 4% +30%
Oil (bbls) 8,100 $30.55 8,300 $21.06 - 2% +45%
___________________________________
(1) Includes $.69 Mcf hedging loss.
(2) Includes $1.72 Mcf hedging loss.
(3) Includes $.54 Mcf hedging gain.
(4) Includes $.45 Mcf hedging gain.
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 13,000 gross acre Sand Creek Prospect and
its 3,000 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. CREDO has recently
expanded its acreage ownership in the area by participating in
satellite projects operated by other companies.
In total, 19 wells have been drilled on the two prospects in
the last few years, of which 15 were either completed as
producers or are awaiting completion. Currently, one well is
drilling and 10 wells are projected for drilling. Three of those
wells will be drilled in June and July. Both prospects have
ample room for additional exploration.
On the east side of the Sand Creek Prospect, the company
participated for a 24% interest in the Easterwood #11-23. The
7,400-foot well encountered 12 feet of Morrow sand and five feet
of Chester limestone, both of which produced gas during
completion testing. The well is currently awaiting pipeline
connection and fracture stimulation.
Approximately one mile south of the Easterwood #11-23, the
company participated in the 7,450-foot Easterwood #6-26 which
encountered nine feet of Morrow sand but tested water. The well
has been plugged. One mile to the south, the company drilled its
7,550-foot Arley #1-35 which was also plugged.
Three miles south of the Arley, the company is participating
for a 37.5% interest in the Deanna #1-15, which is currently
drilling. This well targets Morrow sand at 7,700 feet. The
Deanna is the first well on the southeast corner of the Sand
Creek Prospect where the company also owns significant interests
in several offsetting sections.
On the west side of the Sand Creek Prospect, the company has
participated with a 12% interest in three recent wells. These
wells are currently classified as "tight holes", meaning that for
proprietary business reasons the company is not releasing
drilling information.
Fifteen miles south of the Sand Creek Prospect, the company
has drilled its third well on the Thurmond Prospect. The
Thurmond-State #2-36 encountered 11 feet of Morrow sand, and is
currently producing 175 Mcfg (thousand cubic feet of gas) per
day. CREDO owns 37.5% and is the operator.
Three new wells will be drilled beginning in the last week
of June. The Gillenwaters #1-34 will be drilled on the Two
Springs Prospect as a north step-out to the previously reported
Wills #1-3. The well will test Morrow and Chester zones at 7,200
feet. CREDO owns a 28% interest and is the operator.
On the Sand Creek Prospect, the Derby #1-22 will test Morrow
sand at 7,600 feet. This step-out well will be located about one
mile west of the recently completed Easterwood #11-23. CREDO is
the operator and owns 36%. The Glendena #2-5 will be drilled
about one-half mile south of the Glendena #1-5, which has been a
prolific producer for the area. The Glendena #2-5 will test
Morrow sand at 7,600 feet. The company owns 40% and is the
operator.
In Woods County, Oklahoma, successful drilling is continuing
in the South Fork Field. To date, the company has joined for 7%
in drilling 13 development wells in the field. The most recent
well, the Erickson #3-30, encountered 15 feet of Mississippi
dolomite at 5,200 feet which electric logs indicate should be
productive. The well is currently awaiting completion.
In Beaver County, Oklahoma, development drilling is
continuing on the company's Traxler property. The previously
reported Wilkerson #2-1 encountered 36 feet of Chester limestone
at 8,100 feet. For April, daily production averaged 2.3 MMcfg,
nine barrels of condensate and minimal water. CREDO owns 15%.
About three-quarters of a mile southeast of the Wilkerson
well, the company is preparing to drill the Ronnie #1-6 to test
the Chester formation at 8,100 feet. CREDO owns 45% and will be
the operator.
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 company recently installed Calliope on four of the nine
candidate wells acquired late last year. Previous owners gave up
on the wells and all but one had been completely dead for at
least a year. Management believes that all of the installations
were successful in adding significant, long-lived reserves and
immediately restoring production rates to levels that will
provide excellent rates of return on investment.
Calliope's operating depth range was substantially extended
with a successful installation on the 18,400-foot Green Estate
well located in Beckham County, Oklahoma. Calliope's previous
record depth was 12,500 feet. The Green Estate well had produced
28.8 Bcfg and, at the time Calliope was installed, had been dead
for three years. Testing and well data indicated that
significant reservoir damage was caused by a workover performed
by the previous owner. Although the company expected Calliope
production to be compromised, it proceeded with the installation
in anticipation of strong gas prices and the well's high reserve
potential.
Calliope immediately restored daily production to over 300
Mcfg (thousand cubic feet of gas) and five to seven barrels of
condensate and water. Installation cost was approximately
$400,000. Reservoir pressure indicates that up to 2.0 Bcfg
(billion cubic feet of gas) of remaining gas reserves could be
recovered by Calliope (8/8ths basis). CREDO owns a 65% working
interest in the well and is the operator.
Calliope was also recently installed on the 12,300-foot
Meacham well located in Custer County, Oklahoma. The well had
produced 20.0 Bcfg and 322,000 barrels of oil and was flowing at
marginal rates before the installation. During the installation
a perforating gun was lost in the hole resulting in a compromised
installation. Nevertheless, Calliope increased daily production
to 150 Mcfg and two barrels of condensate and water. The cost to
install Calliope was approximately $350,000 and it is expected to
add about 1.0 Bcfg to gross recoverable reserves. CREDO owns an
approximate 80% working interest and is the operator.
In mid-February Calliope was installed on the 11,100-foot
Fee well located in Hemphill County, Texas. The well had
produced 8.0 Bcfg and had been dead for about a year. Calliope
immediately restored daily production to 250 Mcfg and six barrels
of condensate and it has since remained at that level. The
installation cost about $150,000 and the company estimates that
Calliope added approximately 500 MMcfg (million cubic feet of
gas) to gross recoverable reserves. CREDO owns an approximate
78% working interest and is the operator.
In early March Calliope was installed on the 12,400-foot
Horn well located in Grady County, Oklahoma. The well had
produced 12.9 Bcfg and had been dead for three years. Prior to
being shut-in, the well apparently experienced a packer leak and
soap was used to stimulate production, both of which compromised
the permeability of the reservoir. Nevertheless, Calliope
immediately restored daily production to approximately 180 Mcfg
and it has since remained at that level. The installation cost
about $280,000. Reservoir pressure indicates that up to 1.0 Bcfg
of remaining reserves could be recovered by Calliope (8/8ths
basis). CREDO owns a 78% working interest in the well and is the
operator.
Calliope has been more flexible than Management originally
expected and it has proven it will work successfully over a broad
range of wellbore conditions, including wells with packers and
tubing diameters of less than 2.0-inches. The Green Estate
application extended Calliope's operating depth range by almost
50% and established its viability in a rigorous deep well
application. This is a very important accomplishment because
installation and operating complexity increases exponentially as
we move into significantly deeper reservoirs.
The animation portion of the Calliope multimedia project is
complete, and the project is currently in the final production
stage.
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 six month periods ended April 30, 2003, the company
recognized $2,000 and $4,000, respectively, of accretion expense
on the liability and a decrease of $12,000 and $17,000,
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:
Six Months Ended Three Months Ended
April 30, April 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Income as reported $1,187,000 $ 537,000 $ 502,000 $ 327,000
Pro forma stock
compensation expense,
net of tax (24,000) (36,000) (12,000) (18,000)
Pro forma net income $1,163,000 $ 501,000 $ 490,000 $ 309,000
========== ========== ========== ==========
Basic net income
per share:
As reported $ 0.30 $ 0.14 $ 0.13 $ 0.08
======= ======= ======= =======
Pro forma $ 0.29 $ 0.13 $ 0.13 $ 0.08
======= ======= ======= =======
Diluted net income
per share:
As reported $ 0.30 $ 0.14 $ 0.13 $ 0.08
======= ======= ======= =======
Pro forma $ 0.29 $ 0.13 $ 0.13 $ 0.08
======= ======= ======= =======
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
Six Months Ended April 30, 2003 Compared to Six Months Ended
April 30, 2002
For the six months ended April 30, 2003, net income rose
121% to a record $1,187,000 compared to $537,000 last year.
Higher net income resulted primarily from an increase in product
prices.
Total revenues rose 39% to $3,475,000 compared to $2,493,000
last year. Oil and gas sales rose 39% to $3,034,000 compared to
$2,177,000 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 95% to $4.73 per Mcf
compared to $2.42 last year. Hedging transactions reduced first
half 2003 price realizations by $.69 per Mcf, or 15%, compared to
an increase of $.54 per Mcf, or 22%, last year. As a result,
total natural gas price realizations were $4.04 per Mcf compared
to $2.96 last year. Net wellhead prices for oil rose 48% to
$28.27 per barrel compared to $19.06 last year. The net effect
of these price changes and hedging transactions was to increase
oil and gas sales $833,000. The net effect of volume changes was
minimal. Operating income increased 4% due to drilling overhead
income that was partially offset by the sale of several marginal
operated properties. Investment income and other rose 157% to
$190,000 compared to $74,000 last year due to improved
performance from market timers who manage the bulk of the
company's investments.
Total costs and expenses increased 12% to $1,926,000 in the
first half of fiscal 2003 compared to $1,726,000 last year. Oil
and gas production expenses rose 5%, or $34,000, due primarily to
the additional operating costs associated with production from
new wells and Calliope. Depreciation, depletion and amortization
increased 8% primarily due to an increase in the amortizable full
cost pool base. General and administrative expenses increased
25% 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 April 30, 2003 Compared to Quarter Ended
April 30, 2002
For the quarter ended April 30, 2003, net income rose 53% to
$502,000 compared to $327,000 for the same quarter last year.
Higher net income resulted primarily from an increase in product
prices.
Total revenues rose 28% to $1,684,000 compared to $1,312,000
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 124% to $5.49 per
Mcf compared to $2.45 last year. Hedging transactions reduced
second quarter price realizations $1.72 per Mcf, or 31%, compared
to an increase of $.45, or 18%, last year. As a result, total
natural gas price realizations were $3.77 per Mcf compared to
$2.90 last year. Net wellhead prices for oil rose 45% to $30.55
per barrel compared to $21.06 last year. The net effect of these
price changes and hedging transactions was to increase oil and
gas sales $364,000. The effect of volume changes was minimal.
Operating income increased 8% due to drilling overhead income
that was partially offset by the sale of several marginally
operated properties. Investment income and other rose 75% to
$114,000 compared to $65,000 last year due to improved
performance from market timers who manage the bulk of the
company's investments.
Total costs and expenses increased 17% to $987,000 in the
second quarter of 2003 compared to $845,000 last year. Oil and
gas production expenses rose 22%, or $67,000, due primarily to
the additional operating costs associated with production from
new wells and Calliope installations. Depreciation, depletion
and amortization fell 3% due primarily due to a decrease in
production volumes between the periods. General and
administrative expenses increased $86,000, or 36%, 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: June 13, 2003 By: /s/ James T. Huffman
------------------------------
James T. Huffman
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ John A. Alsko
------------------------------
John A. Alsko
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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: June 13, 2003
/s/ James T. Huffman
-----------------------------------
James T. Huffman
Chief Executive Officer
I, John A. Alsko, 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: June 13, 2003
/s/ John A. Alsko
-----------------------------------
John A. Alsko
Vice President and
Chief Financial Officer