_______________________________________________________________
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 January 31, 2002
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
February 28, 2002: Common stock, $.10 par value - 3,207,000
Preferred stock, no par value - None issued
_______________________________________________________________
CREDO PETROLEUM CORPORATION
Index to Form 10-QSB
For Quarter Ended January 31, 2002
_______________________________________________________________
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets As of January 31, 2002 (Unaudited)
and October 31, 2001
Consolidated Statements of Operations and Changes in Retained
Earnings (Unaudited) For the Three Month Periods Ended
January 31, 2002 and 2001
Consolidated Statements of Cash Flows (Unaudited) For the
Three Month Periods Ended January 31, 2002 and 2001
Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Not Applicable
_____________________________________________
The consolidated financial statements included herein have been
prepared by the company without audit, and reflect all
adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position of the company
for the periods presented. Certain information and footnote
disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted as allowed by the rules
and regulations of the Securities and Exchange Commission. These
financial statements should be read in conjunction with the
company's Form 10-KSB for the fiscal year ended October 31, 2001.
CREDO PETROLEUM CORPORATION
Consolidated Balance Sheets
A S S E T S
January 31, October 31,
2002 2001
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 980,000 $ 819,000
Short term investments 5,560,000 5,283,000
Receivables:
Trade 273,000 317,000
Accrued oil and gas sales 340,000 367,000
Other 508,000 241,000
----------- -----------
7,661,000 7,027,000
----------- -----------
OIL AND GAS PROPERTIES, net,
at cost, full cost method:
Unevaluated 1,665,000 1,549,000
Evaluated 6,925,000 7,120,000
----------- -----------
8,590,000 8,669,000
----------- -----------
EXCLUSIVE LICENSE AGREEMENT,
net of amortization of
$100,000 in 2002
and $82,000 in 2001 600,000 618,000
----------- -----------
OTHER, net 180,000 156,000
----------- -----------
$17,031,000 $16,470,000
=========== ===========
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 $ 979,000 $ 1,126,000
Income taxes payable 180,000 110,000
----------- -----------
1,159,000 1,236,000
----------- -----------
DEFERRED HEDGING GAINS 110,000 -
----------- -----------
DEFERRED INCOME TAXES 2,021,000 1,935,000
----------- -----------
EXCLUSIVE LICENSE OBLIGATION,
less current portion of $44,000 456,000 456,000
----------- -----------
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,
3,678,000 shares issued 367,000 367,000
Capital in excess of par value 6,453,000 6,453,000
Retained earnings 7,137,000 6,927,000
Other comprehensive income 201,000 14,000
Treasury stock, at cost,
471,000 shares in 2002 and
502,000 shares in 2001 (873,000) (918,000)
----------- -----------
13,285,000 12,843,000
----------- -----------
$17,031,000 $16,470,000
=========== ===========
See accompanying notes.
CREDO PETROLEUM CORPORATION
Consolidated Statements of Operations And Changes in
Retained Earnings - Unaudited
Three Months Ended
January 31,
2002 2001
----------- -----------
REVENUES:
Oil and gas sales $ 1,046,000 $ 1,376,000
Operating 126,000 109,000
Investment income and other 9,000 92,000
----------- -----------
1,181,000 1,577,000
----------- -----------
COSTS AND EXPENSES:
Oil and gas production 360,000 311,000
Depreciation, depletion and
amortization 266,000 183,000
General and administrative 243,000 210,000
Interest 12,000 13,000
----------- -----------
881,000 717,000
----------- -----------
INCOME BEFORE
INCOME TAXES 300,000 860,000
INCOME TAXES (90,000) (258,000)
----------- -----------
NET INCOME 210,000 602,000
RETAINED EARNINGS,
BEGINNING OF PERIOD 6,927,000 4,925,000
----------- -----------
RETAINED EARNINGS,
END OF PERIOD $ 7,137,000 $ 5,527,000
=========== ===========
BASIC NET INCOME
PER SHARE $ .07 $ .20
======= =======
DILUTED NET INCOME
PER SHARE $ .06 $ .19
======= =======
See accompanying notes.
CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Three Months Ended
January 31,
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net income $ 210,000 $ 602,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation, depletion
and amortization 266,000 183,000
Deferred hedging gains 110,000 -
Deferred income taxes 86,000 106,000
Changes in operating assets
and liabilities:
Proceeds from short term
investments 1,006,000 250,000
Purchase of short term
investments (1,283,000) (214,000)
Trade receivables 44,000 (284,000)
Accrued oil and gas sales 27,000 (296,000)
Other (80,000) (22,000)
Accounts payable (147,000) 203,000
Income tax payable 70,000 (18,000)
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 309,000 510,000
----------- -----------
INVESTING ACTIVITIES:
Oil and gas properties, net (157,000) (630,000)
Changes in other
long-term assets (36,000) (20,000)
----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (193,000) (650,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of
stock options (35,000 options
in 2002 and 117,000 in 2001) 68,000 226,000
Purchase of treasury stock
(4,000 shares in 2002 and
5,000 in 2001) (23,000) (25,000)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 45,000 201,000
----------- -----------
INCREASE IN CASH AND
CASH EQUIVALENTS 161,000 61,000
CASH AND CASH EQUIVALENTS:
Beginning of Period 819,000 484,000
----------- -----------
End of Period $ 980,000 $ 545,000
=========== ===========
See accompanying notes.
CREDO PETROLEUM CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
January 31, 2002
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital and cash flow represent a
significant capital resource and source of liquidity. At
January 31, 2002, working capital was $6,392,000, compared to
$5,791,000 at October 31, 2001. Cash flow from operating
activities before working capital changes totaled $672,000 for
the three months, compared to $891,000 from the same period last
year.
Existing working capital and anticipated cash flow are
expected to be sufficient to fund fiscal 2002 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 professional money managers who
specialize in short-term timing of mutual funds. The average
return on the company's investments was minimal for the three
months of fiscal 2002 compared to 2% in the same period last
year. The lower investment return was due primarily to market
conditions during the first quarter of 2002 that limited
investment opportunities for the market timers which manage the
bulk of the company's investments.
Commitments for future capital expenditures were
approximately $500,000 at January 31, 2002. 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 oil and 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. All other futures
transactions are accounted for as speculative transactions and
gains and losses are immediately recognized.
At January 31, 2002, open hedge positions totaled
310,000 Mcfg (thousand cubic feet of gas) covering the months of
March through July 2002 at an average price of $3.20 per Mcf.
Subsequent to first quarter end, 70 MMcfg was added to the hedge
at an average price of $3.04 per Mcf. This hedge represents
approximately 78% of the company's estimated production for those
months. The original hedge represented approximately 94% of
estimated production for the March through July 2002 period,
however, the Glendena #1-5 well was drilled after the hedge was
set and added substantial new production that caused the percent
of hedged production to be substantially lower than originally
intended.
The company deferred a realized gain of $110,000 for the
February hedge (70,000 Mcf) which was closed prior to first
quarter end. Subsequent to first quarter-end, the March hedge
(70,000 Mcf) was closed and a $77,000 gain was realized.
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 January 31, 2002, unrealized gains of
approximately $287,000 ($201,000 net of tax) related to natural
gas hedging transactions were accumulated in Other Comprehensive
Income.
The following table sets forth the components of
Comprehensive Income for each of the periods presented:
Three Months Ended
January 31,
2002 2001
--------- ---------
Net Income $ 210,000 $ 602,000
Other comprehensive income, net of tax:
Change in fair value of derivatives 187,000 60,000
--------- ---------
Comprehensive income $ 397,000 $ 662,000
========= =========
Oil and gas sales volume and price comparisons for the
indicated periods are set forth below.
Three Months Three Months
Ended January 31, 2002 Ended January 31, 2001 Percent Percent
---------------------- ---------------------- Volume Price
Product Volume Price Volume Price Change Change
------- ------ ----- ------- ----- ------ ------
Gas (Mcf) 290,600 $ 3.02(1) 164,600 $ 6.20 +77% -51%
Oil (bbls) 9,600 $17.33 11,900 $29.82 -19% -42%
(1) Includes $.64 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.
Natural gas production increased 77% compared to the same
period last year primarily because of new wells drilled during
fiscal 2001. The most important of those wells was the
7,600-foot Glendena #1-5 well which tested the Morrow formation
on the company's 1,960-acre Sand Creek Prospect in Ellis and
Harper Counties, Oklahoma. The exploratory well encountered two
Morrow sands totaling 31 feet which calculate productive on logs.
It was completed naturally (without acid or fracture treatments)
from only one of the two sands. Pipeline sales commenced in late
October, 2001and the well has since produced on choke at an
average daily rate of about 3.0 MMcfg, six barrels of condensate,
and no water. The second sand will be developed at a future
date. The Glendena well contributed approximately 32% of first
quarter production and accounted for 74% of the first quarter
production increase. CREDO is operator of the well and owns a
40% working interest.
A north offset to the Glendena well has been drilled and is
awaiting completion. The well is currently classified by the
company as a "tight hole", meaning that for proprietary business
reasons the company is not releasing information about the well.
The company anticipates that additional wells will be drilled on
the prospect.
Also in Harper County, Oklahoma, the company has commenced
an exploratory well on its 1,320-acre Two Springs Prospect
located approximately six miles north of the Glendena well. The
well is on the same Morrow sand trend and targets both the Morrow
and Chester formations at 7,450 feet. In Ellis County, Oklahoma,
the company is preparing to drill a second well on its 640-acre
Thurmond Prospect. The well targets the Morrow formation at
8,650 feet.
The company is actively generating drilling prospects along
the Anadarko Shelf of Oklahoma and is currently leasing on
several projects located in the general area of its Two Springs
and Sand Creek Prospects.
The company has installed its patented Calliope Gas Recovery
System on eight wells ranging in depth from 6,500 to 18,600 feet.
Each of these applications was a rigorous test for Calliope.
Three applications were on dead wells - one for five years - that
were scheduled to be plugged and abandoned. After being
reinvigorated by Calliope, these three wells are currently
CREDO's second, third and seventh most valuable producing
properties. Calliope wells accounted for 16% of the company's
gas production volume in the first quarter of fiscal 2002, and
they represent 24% of the company's estimated proved reserve
quantities at fiscal 2001 year-end.
The company is actively seeking to acquire wells, or enter
into arrangements with other companies, for application of its
Calliope Gas Recovery System. The run-up in gas prices during
2000 and 2001 severely hindered the company's efforts to purchase
wells for Calliope. However, the recent sharp decline in gas
prices appears to have improved acquisition opportunities. The
purchase of two Calliope wells is currently being finalized, and
negotiations are in progress to purchase several other wells.
In addition, the company is considering other strategies to
install Calliope on more wells such as joint venturing with
certain large companies, and is developing a highly sophisticated
multimedia presentation to market Calliope.
As a gas well depletes, technologies that rely on bottom
hole pressure to lift liquids that load-up the well and restrict
gas flow become inefficient. In many gas wells, the operating
limits of conventional liquid lift technologies cause billions of
cubic feet of gas to be left behind and substantial profits to be
lost. For those wells, Calliope will achieve substantially lower
reservoir abandonment pressure than conventional production
methods because it does not rely on bottom hole pressure or
adequate fluid volumes to lift liquids.
The company has proved to its satisfaction that Calliope
will add .5 to 2.0 Bcf of gas reserves to many dead or uneconomic
gas wells. The 11,800-foot J. C. Carroll well provides an
excellent example of Calliope's potential. When the well was
purchased for salvage value in 1999, it had not produced
commercially in five years. Calliope immediately restored
production to 660 thousand cubic feet of gas per day. The
company estimates that Calliope will recover 1.7 billion cubic
feet of additional gas from the Carroll well. It is the
company's second most valuable asset.
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
Quarter Ended January 31, 2002 Compared to Quarter Ended
January 31, 2001
Net income for the quarter ended January 31, 2002 fell
65% to $210,000 compared to $602,000 for the same quarter last
year. Although successful drilling boosted production 77%, lower
net income resulted primarily from the combination of sharply
lower prices (natural gas down 51% and oil down 42%), much lower
investment returns, and the high cost of a major well workover.
Total revenues fell 25% to $1,181,000 in the first quarter
of 2002 compared to $1,577,000 for the same quarter last year.
Oil and gas sales fell 24% to $1,046,000 compared to $1,376,000
last year. Refer to the table and discussion on pages 7 and 8
for details of oil and gas prices and volumes for the applicable
periods. Net wellhead natural gas prices fell 62% to $2.38 per
Mcf compared to $6.20 last year. However, hedging transactions
added $.64 per Mcf to first quarter gas price realizations. As a
result, total natural gas price realizations were $3.02 per Mcf
compared to $6.20 last year. There were no hedging transactions
last year. Net wellhead prices for oil fell 42% to $17.33 per
barrel compared to $29.82 last year. The net effect of these
price changes and hedging transactions was to reduce oil and gas
sales $591,000. Gas volumes increased 77% and oil volumes fell
19%. The net effect of volume changes was to increase oil and
gas sales $261,000. Operating income increased $17,000, or 16%,
due to increased drilling supervision income and the addition of
several operated wells. As discussed on page 6, the average
return on the company's investments was minimal in the current
quarter compared to 2% last year due primarily to market
conditions during the current quarter that limited investment
opportunities for the market timers which manage the bulk of the
company's investments.
Total costs and expenses increased 23% to $881,000 in the
first quarter of 2002 compared to $717,000 last year. Oil and
gas production expenses rose 16%, or $49,000 due to a major well
workover that cost approximately $60,000. Depreciation,
depletion and amortization increased 45% primarily due to a net
increase in production volume between the periods. General and
administrative expenses increased $33,000, or 16%, due to
inflationary pressures and additional staffing. Interest expense
relates to the accrual of interest on the exclusive license
agreement obligation, due annually on September 1st. Income
taxes were provided at 30% in both periods.
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: March 14, 2002 By: /s/ James T. Huffman
------------------------------
James T. Huffman
President and Chief Executive Officer
By: /s/ John A. Alsko
------------------------------
John A. Alsko
Vice President and
Chief Financial Officer