<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934.
----------------
For Quarter Ended July 31, 1996 Commission File Number 0-8877
CREDO PETROLEUM CORPORATION
Colorado 84-0772991
- ------------------------ ----------------------------
(State of Incorporation) (IRS Employer Identification)
1801 Broadway, Suite 900
Denver, Colorado 80202
(303) 297-2200
----------------------------
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 August 31, 1996:
Common stock, $.10 par value - 3,073,000
Preferred stock, no par value - None Issued
<PAGE>
CREDO PETROLEUM CORPORATION
INDEX TO FORM 10-Q
July 31, 1996
PART I - FINANCIAL INFORMATION (UNAUDITED)
Page
----
Consolidated Balance Sheets as of July 31, 1996
and October 31, 1995 3
Consolidated Statements of Earnings and Changes in
Retained Earnings for the nine month and three month
periods ended July 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the nine
month periods ended July 31, 1996 and 1995 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-10
PART II - OTHER INFORMATION
Not Applicable
--------------------
The financial information furnished in this Form 10-Q reflects 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.
<PAGE>
<PAGE>
CREDO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, 1996 October 31, 1995
(Third Qtr. End) (Fiscal Year End)
Unaudited Audited
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 237,000 $ 130,000
Temporary cash investments 2,495,000 2,580,000
Receivables:
Trade 156,000 129,000
Accrued oil and gas sales 242,000 169,000
Accrued interest 6,000 6,000
Other 76,000 34,000
---------- ---------
3,212,000 3,048,000
---------- ----------
Oil and gas properties, at cost
using full cost method:
Unevaluated 806,000 709,000
Evaluated 4,497,000 4,601,000
---------- ----------
5,303,000 5,310,000
---------- ----------
Long-term assets:
Operating rights and other
intangible assets, net 247,000 312,000
Other, net 36,000 48,000
---------- ----------
283,000 360,000
---------- ----------
$8,798,000 $8,718,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 450,000 $ 473,000
---------- ----------
Deferred income taxes 636,000 557,000
---------- ----------
Stockholders' equity:
Preferred stock, without par
value 5,000,000 shares
authorized, none issued - -
Common stock, $.10 par value,
20,000,000 shares authorized,
3,666,000 shares issued 366,000 366,000
Capital in excess of par value 6,236,000 6,236,000
Retained earnings 2,094,000 1,940,000
Treasury stock, at cost,
583,000 shares in 1996 and
507,000 in 1995 (984,000) (854,000)
---------- ----------
7,712,000 7,688,000
---------- ----------
Commitments ---------- ----------
$8,798,000 $8,718,000
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
<PAGE>
CREDO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND CHANGES IN
RETAINED EARNINGS - UNAUDITED
<TABLE>
<CAPTION>
Nine Months Nine Months Quarter Quarter
Ended Ended Ended Ended
July 31, July 31, July 31, July 31,
1996 1995 1996 1995
---------- -------- - --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $1,248,000 $1,134,000 $ 450,000 $ 366,000
Operating 310,000 317,000 104,000 101,000
Interest and other 117,000 149,000 37,000 57,000
---------- ---------- --------- ----------
1,675,000 1,600,000 591,000 524,000
---------- --------- --------- ----------
Costs and expenses:
General and
administrative 459,000 432,000 153,000 145,000
Depreciation, depletion
and amortization 422,000 412,000 146,000 130,000
Oil and gas production 558,000 467,000 214,000 165,000
---------- --------- --------- ---------
1,439,000 1,311,000 513,000 440,000
---------- --------- --------- ---------
Income before income taxes 236,000 289,000 78,000 84,000
Income taxes (82,000) (101,000) (27,000) (30,000)
---------- --------- ---------- ----------
Net income 154,000 188,000 51,000 54,000
Retained earnings,
beginning of period 1,940,000 1,689,000 2,043,000 1,823,000
---------- ---------- --------- ----------
Retained earnings, end
of period $2,094,000 $1,877,000 $2,094,000 $1,877,000
========== ========== ========== ==========
Net income per share $ .05 $ .06 $ .02 $ .02
===== ===== ===== =====
Weighted average common
shares outstanding during
the period 3,114,000 3,214,000 3,098,000 3,204,000
========= ========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
CREDO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
July 31, 1996 July 31, 1995
------------- -------------
<S> <C> <C>
Operating activities:
Net income $ 154,000 $ 188,000
Noncash expenses included in
net income:
Depreciation, depletion and
amortization 422,000 412,000
Deferred income taxes 82,000 101,000
Other 12,000 9,000
Changes in assets and liabilities:
Trade receivables (27,000) (57,000)
Accrued oil and gas sales (73,000) 45,000
Accrued interest - 10,000
Other (42,000) 28,000
Accounts payable (23,000) (241,000)
---------- ----------
Net cash provided by operating
activities 505,000 495,000
---------- ----------
Investing activities:
Oil and gas properties (351,000) (392,000)
Purchase of certificates
of deposit and other investments (1,499,000) (900,000)
Proceeds from certificates of
deposit and other investments 1,584,000 1,403,000
Changes in long-term assets (2,000) (23,000)
---------- ----------
Net cash provided by (used in)
investing activities (268,000) 88,000
---------- ----------
Financing activities:
Purchase of treasury stock (130,000) (117,000)
Payoff of note payable - (455,000)
---------- ----------
Net cash used by financing activities (130,000) (572,000)
---------- ----------
Increase in cash
and cash equivalents 107,000 11,000
Cash and cash equivalents:
Beginning of period 130,000 331,000
---------- ----------
End of period $ 237,000 $ 342,000
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
CREDO PETROLEUM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
July 31, 1996
Liquidity and Capital Resources
The company's working capital and cash flow represent a
significant capital resource and source of liquidity.
At third quarter-end, working capital was $2,762,000, up 7% from
fiscal year ended October 31, 1995. Cash flow from operating
activities before working capital changes totaled $670,000 for the
nine months. Cash flow was used primarily to fund net oil and gas
property expenditures and purchases of treasury stock.
Existing working capital and anticipated cash flow are expected
to be sufficient to fund fiscal 1996 operations. However, if the
company were to make one or more major acquisitions 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.
Commitments for future capital expenditures were not material at
first quarter-end. 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 Interest Rates
Numerous uncertainties exist in the oil and gas exploration and
production industry which are beyond the company's ability to predict
with reasonable accuracy.
Deregulation of natural gas pricing and transportation have
resulted in far-reaching and fundamental changes in the transportation
and marketing segments of the natural gas industry. Gas price
decontrol and the advent of an active spot market for natural gas have
resulted in the company's gas sales and prices becoming more seasonal.
Sales and prices accelerate in peak demand periods such as the winter
months and subside during lower demand periods.
Uncertainties also exist with respect to the supply of oil
available to world markets. OPEC exercises considerable influence
over the worldwide oil supply and thus the prices for petroleum
products.
The company periodically hedges the price of its oil and gas
production. Hedging transactions relate to anticipated production
volumes and take the form of forward, or "short", selling all or part
of such volumes in the futures market. Hedges are closed by
purchasing offsetting "long" positions. The company may hedge its
production when the potential for significant downward price movement
is anticipated. Hedges are generally expected to be closed as related
production occurs but may be closed earlier if the anticipated
<PAGE>
downward price movement occurs or if the company believes that the
potential for such movement has abated. The company's most
significant hedging risk is that cash prices in markets where the
company sells its products will not move in tandem with futures market
prices, and thus, that gains or losses in one market will not be fully
offset by opposite moves in the other market. Hedging gains or losses
are recognized as adjustments to oil and gas sales as the hedged
produce is produced.
The company's decisions are based on a number of very subjective
factors which include its gas price outlook, futures market prices
available to implement a hedge, and maintenance of historical cash and
futures market price relationships.
In the first fiscal quarter 1996, the historical relationship between
cash prices in the company's market areas and futures market prices
changed dramatically due primarily to localized cold weather in the
eastern U.S. which caused regional supply and demand dislocations.
This divergence in the historical relationships eliminated the hedging
option used successfully by the company in fiscal 1995. Consequently,
all futures positions were immediately liquidated and a net loss on
futures transactions applicable to fiscal 1996 totaling $25,000 was
recorded in the first quarter. Hedging gains in the first nine months
of fiscal 1995 totaled $119,000.
Oil and gas sales volume and price comparisons for the indicated
periods are set forth below.
<TABLE>
<CAPTION>
Nine Months Nine Months Percent Percent
Ended July 31, 1996 Ended July 31, 1995 Volume Price
------------------- ------------------
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 409,700 $ 1.56(1) 340,100 $ 1.67(2) +20% - 6%
Oil (bbls) 31,700 $18.87 34,200 $16.58 - 7% +14%
Three Months Three Months Percent Percent
Ended July 31, 1996 Ended July 31, 1995 Volume Price
------------------- -------------------
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------- ----- ------ ------
Gas (Mcf) 141,900 $ 1.66 103,500 $ 1.71(3) +37% - 3%
Oil (bbls) 10,300 $19.95 11,200 $16.89 - 8% +18%
Three Months Three Months Percent Percent
Ended July 31, 1996 Ended April 30, 1996 Volume Price
------------------- --------------------
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 141,900 $ 1.66 141,800 $ 1.70 0% - 2%
Oil (bbls) 10,300 $19.95 10,400 $19.87 - 1% 0%
(1) Includes a $.06 per Mcf hedging loss.
(2) Includes a $.35 per Mcf hedging gain.
(3) Includes a $.45 per Mcf hedging gain.
</TABLE>
The interest rate earned on short-term investments averaged
approximately 5.9% for the nine months ended July 31, 1996 compared to
6.2% in the same period of 1995. For the third quarter, the rate
averaged 5.4% compared to 6.8% for the same quarter last year and 5.7%
in the immediately proceeding quarter. Current interest rates
available to the company are approximately 5.8%.
<PAGE>
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 calculate due in part to
the long-lived nature of depleting oil and gas reserves. 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, changes in reserve
estimates, changes in reserve lives, and changes in tax rates or tax
laws.
Results of Operations
Nine Months Ended July 31, 1996 Compared to Nine Months Ended July 31,
1995
For the first nine months of fiscal 1996, net income was $154,000
compared to $188,000 last year. The first nine months of this year
was impacted by a $15,000 hedging loss while last year's first nine
months included a $119,000 hedging gain.
Total revenues were $1,675,000 in the first nine months of 1996
compared to $1,600,000 last year. Oil and gas sales increased
$114,000, or 10%. Despite continued low prices in the Rocky Mountain
region where approximately 40% of the company's gas production is
located, net wellhead gas prices received rose 23% to $1.62 per Mcf
compared to $1.32 per Mcf last year. However, net gas price
realizations, which reflect the effect of hedging gains and losses,
fell to $1.56 per Mcf in 1996 compared to $1.67 per Mcf last year.
Hedging losses totaled $.06 per Mcf in 1996 compared to hedging gains
of $.35 per Mcf in 1995. Refer to pages 6 and 7 for a more detailed
discussion of gas price hedging and the resulting gains and losses.
Oil price realizations rose 14% to $18.87 per barrel. The net effect
of these product price changes was to increase oil and gas sales by
$48,000. Gas volumes increased 20% while oil volumes declined 7%.
The gas volume increase was due to increased drilling in fiscal 1995
together with production added from a multi-well acquisition in fiscal
1996. The decline in oil volume was primarily due to the divesture of
marginal wells. The net effect of these volume changes was to
increase oil and gas sales by $66,000. Operating income declined
due to the sale of the marginal wells. Interest and other income
decreased due to lower yields on cash investments and lower net returns
on the company's bond investments as a result of rising interest rates.
Total costs and expenses increased to $1,439,000 in the first nine
months of 1996 compared to $1,311,000 in the same period last year.
General and administrative expenses increased due to inflationary
pressures and the timing of certain expenditures. Increased depreciation,
depletion and amortization reflects a 10% increase in gas equivalent
production. Increased oil and gas production expenditures reflect
<PAGE>
operating costs associated with properties acquired in 1996 and
significantly increased remedial work to improve production in view
of stronger oil and gas prices.
Income taxes were provided at 35% in both periods.
Quarter Ended July 31, 1996 Compared to Quarter Ended July 31, 1995
In the third quarter of 1996, net income was $78,000 compared to
$84,000 in the same period last year. Last year's quarter included
a $47,000 hedging gain.
Total revenues increased 13% to $591,000 in the third quarter of
1996 compared to $524,000 in the same period last year. Oil and gas
sales increased $84,000, or 23%. Despite continued low prices in the
Rocky Mountain region, net wellhead gas prices received rose 32% to
$1.66 per Mcf compared to $1.26 per Mcf last year. Net gas price
realizations, which reflect the effect of hedging gains and losses,
decreased 3% to $1.66 per Mcf in 1996 compared to $1.71 per Mcf last
year. There were no hedging gains or losses in the third quarter of
1996 compared to hedging gains of $.45 per Mcf in 1995. Refer to
pages 6 and 7 for a more detailed discussion of gas price hedging and
the resulting gains and losses. Oil price realizations increased 18%
to $19.95 per barrel. The net effect of these price changes was to
decrease oil and gas sales by $00,000. Gas volumes increased 37% and
oil volumes declined 8%. The gas volume increase was due to increased
drilling in fiscal 1995 together with added production from a
multi-well acquisition in fiscal 1996. The decline in oil volume was due
primarily to the divesture of marginal wells last year. The net
effect of these volume changes was to increase oil and gas sales by
$00,000. Operating income increased slightly as several operated
wells were acquired which offset the effect of the marginal wells sold
last year. Interest and other income decreased in the current quarter
due to lower yields on cash investments and lower net returns on the
company's bond investments as a result of rising interest rates.
Total costs and expenses were $513,000 in the third quarter of
1996, up 17% from the $440,000 in the same period last year. General
and administrative expenses increased due to inflationary pressures
and the timing of certain expenditures. Increased depreciation,
depletion and amortization reflects a 19% increase in gas equivalent
production. The increase in oil and gas production expenses reflects the
operating costs associated with properties acquired in 1996 and
significantly increased remedial work to improve production in view of
stronger oil and gas prices.
Income taxes were provided at 35% in both quarters.
Quarter Ended July 31, 1996 Compared to Quarter Ended April 30, 1996
In the third quarter of 1996, net income was $78,000 compared to
$61,000 in the prior quarter.
Total revenues increased 3% to $591,000 compared to $576,000 in the
immediately preceding quarter. Oil and gas sales decreased to
$450,000 from $452,000 in the prior quarter. Net gas price
realizations decreased to $1.66 per Mcf in the third quarter of 1996
compared to $1.70 per Mcf last quarter. There were no hedging gains
<PAGE>
or losses in the second or third quarters of 1996. Refer to pages 6
and 7 for a more detailed discussion of gas price hedging and the
resulting gains and losses. Oil price realizations increased to
$19.95 per barrel from $19.87 per barrel in the prior quarter. The
net effect of these price changes was to decrease oil and gas sales by
$2,000. Gas and oil volumes remained steady between the periods and,
thus, had an insignificant effect oil and gas sales. Operating income
was unchanged from last quarter. Interest and other income increased
in the current quarter due to improved returns on the company's bond
investments.
Total costs and expenses increased 6% to $513,000 in the third
quarter of 1996 compared to $482,000 in the immediately preceding
quarter. General and administrative expenses increased due to
inflationary pressures and the timing of certain expenditures.
Depreciation, depletion and amortization was virtually unchanged
reflecting stable oil and gas sales volumes between the quarters.
Oil and gas production costs increased due to the timing of remedial
work to improve production in view of stronger oil and gas prices.
Income taxes were provided at 35% in both quarters.
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.
CREDO PETROLEUM CORPORATION
Date: September 16, 1996 By: /s/ James T. Huffman
James T. Huffman
President and
Chief Executive Officer
By: /s/ B. J. Sullivan
B. J. Sullivan
Vice President-Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Consolidated Statements of Earnings
found on pages 3 and 4 of the company's Form 10-Q for the year-to-date,
and is qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 237,000
<SECURITIES> 2,495,000
<RECEIVABLES> 156,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,212,000
<PP&E> 11,058,000
<DEPRECIATION> 5,755,000
<TOTAL-ASSETS> 8,798,000
<CURRENT-LIABILITIES> 450,000
<BONDS> 0
0
0
<COMMON> 366,000
<OTHER-SE> 7,346,000
<TOTAL-LIABILITY-AND-EQUITY> 8,798,000
<SALES> 1,248,000
<TOTAL-REVENUES> 1,675,000
<CGS> 558,000
<TOTAL-COSTS> 980,000
<OTHER-EXPENSES> 459,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 236,000
<INCOME-TAX> 82,000
<INCOME-CONTINUING> 154,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 154,000
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
