<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 January 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 March 1, 1996:
Common stock, $.10 par value - 3,107,000
Preferred stock, no par value - None Issued
<PAGE> CREDO PETROLEUM CORPORATION
INDEX TO FORM 10-Q
January 31, 1996
PART I - FINANCIAL INFORMATION (UNAUDITED)
Page
---
Consolidated Balance Sheets as of January 31, 1996
and October 31, 1995 3
Consolidated Statements of Earnings and Changes in
Retained Earnings for the three month periods ended
January 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the three
month periods ended January 31, 1996 and 1995 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-9
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>
CREDO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, 1996 October 31, 1995
(First Qtr. End) (Fiscal Year End)
Unaudited Audited
-------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 193,000 $ 130,000
Temporary cash investments 2,458,000 2,580,000
Receivables:
Trade 141,000 129,000
Accrued oil and gas sales 207,000 169,000
Accrued interest 8,000 6,000
Other 67,000 34,000
----------- ------------
3,074,000 3,048,000
----------- -----------
Oil and gas properties, at cost,
using full cost method:
Unevaluated 704,000 709,000
Evaluated 10,056,000 10,000,000
----------- -----------
10,760,000 10,709,000
Less accumulated depreciation,
depletion and amortization (5,508,000) (5,399,000)
----------- ------------
5,252,000 5,310,000
----------- ------------
Long-term assets:
Operating rights and other
intangible assets, net 290,000 312,000
Other, net 43,000 48,000
----------- -----------
333,000 360,000
----------- -----------
$ 8,659,000 $ 8,718,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 413,000 $ 473,000
----------- -----------
Deferred income taxes 579,000 557,000
----------- -----------
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 1,982,000 1,940,000
Treasury stock, at cost,
546,000 shares in 1996 and
507,000 in 1995 (917,000) (854,000)
------------ ------------
7,667,000 7,688,000
----------- ------------
Commitments
----------- -----------
$ 8,659,000 $ 8,718,000
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
CREDO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND CHANGES IN
RETAINED EARNINGS - UNAUDITED
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
January 31, 1996 January 31, 1995
---------------- ---------------
<S> <C> <C>
Revenues:
Oil and gas sales $ 346,000 $ 400,000
Operating 102,000 112,000
Interest and other 60,000 44,000
---------- ----------
508,000 556,000
---------- ----------
Costs and expenses:
General and administrative 158,000 139,000
Depreciation, depletion and
amortization 131,000 141,000
Oil and gas production 155,000 144,000
---------- ----------
444,000 424,000
---------- ----------
Income before income taxes 64,000 132,000
Income taxes (22,000) (46,000)
---------- ----------
Net income 42,000 86,000
Retained earnings,
beginning of period 1,940,000 1,689,000
---------- ----------
Retained earnings,
end of period $1,982,000 $1,775,000
========== ==========
Net income per share $ .01 $ .03
===== =====
Weighted average common
shares outstanding during
the period 3,138,000 3,227,000
========== ==========
See accompanying notes.
</TABLE>
<PAGE>
CREDO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
January 31, 1996 January 31, 1995
---------------- ---------------
<S> <C> <C>
Operating activities:
Net income $ 42,000 $ 86,000
Noncash expenses included in
net income:
Depreciation, depletion and
amortization 131,000 141,000
Deferred income taxes 22,000 46,000
Other 4,000 4,000
Changes in assets and liabilities:
Trade receivables (12,000) (40,000)
Accrued oil and gas sales (38,000) (34,000)
Accrued interest (2,000) 7,000
Other (33,000) -
Accounts payable (60,000) (145,000)
--------- ---------
Net cash provided by operating
activities 54,000 65,000
-------- ---------
Investing activities:
Oil and gas properties (51,000) (168,000)
Purchase of certificates
of deposit and other investments (498,000) (500,000)
Proceeds from certificates of
deposit and other investments 619,000 968,000
Changes in long-term assets 2,000 (1,000)
-------- ---------
Net cash provided by investing
activities 72,000 299,000
-------- --------
Financing activities:
Purchase of treasury stock (63,000) (89,000)
Payoff of note payable - (455,000)
-------- ---------
Net cash used by financing activities (63,000) (544,000)
--------- ---------
Increase (decrease) in cash
and cash equivalents 63,000 (180,000)
Cash and cash equivalents:
Beginning of period 130,000 331,000
-------- ---------
End of period $193,000 $151,000
======== ========
See accompanying notes.
</TABLE>
<PAGE>
CREDO PETROLEUM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
January 31, 1996
Liquidity and Capital Resources
The company's working capital and cash flow represent a
significant capital resource and source of liquidity.
At first quarter-end, working capital was $2,661,000, up
slightly, from fiscal year ended October 31, 1995. Cash flow from
operating activities before working capital changes totaled $199,000
for the three 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
<PAGE>
is anticipated. Hedges are generally expected to be closed as related
production occurs but may be closed earlier if the anticipated
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
product 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 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
all futures transactions applicable to fiscal 1996 totaling $25,000,
or $.20 per Mcf, was recorded. Hedging gains in fiscal 1995 totaled
$161,000.
Oil and gas sales volume and price comparisons for the indicated
periods are set forth below.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
January 31, 1996 January 31, 1995
---------------- -----------------
Percent Percent
Volume Price
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 127,400 $ 1.32* 124,900 $ 1.67** + 2% -21%
Oil (BO) 10,900 $16.88 12,000 $15.76 - 9% + 7%
Three Months Ended Three Months Ended
January 31, 1996 October 31, 1995
---------------- ----------------
Percent Percent
Volume Price
Product Volume Price Volume Price Change Change
- ------- ------ ------ ------ ----- ------ ------
Gas (Mcf) 127,400 $ 1.32* 117,900 $ 1.61*** + 8% -18%
Oil (BO) 10,900 $16.88 10,500 $15.94 + 3% + 6%
</TABLE>
* Includes a $.20 per Mcf hedging loss.
** Includes a $.21 per Mcf hedging gain.
***Includes a $.35 per Mcf hedging gain.
The interest rate earned on short-term investments averaged 6.5%
for the three months ended January 31, 1996 compared to 5.2% in the
same period in 1995. Current interest rates available to the company
are approximately 5.0%.
<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
Quarter Ended January 31, 1996 Compared to Quarter Ended January 31,
1995
In the first quarter 1996, net income was $42,000 compared to
$86,000 in the same period last year.
Total revenues decreased 9% to $508,000 in the first quarter of
1996 compared to $556,000 in the same period last year. Oil and gas
sales decreased $54,000, or 14%. Gas price realizations fell 21% due
primarily to a $.20 per Mcf hedging loss recorded in the last quarter
of 1996 compared to a $.21 per Mcf hedging gain in the first quarter
of 1995. Refer to pages 6 and 7 for a more detailed discussion of gas
price hedging and the resulting gains and losses. As the table on
page 7 shows, oil price realizations increased 7% to $16.88 per
barrel. The net effect of these price changes was to reduce oil and
gas sales by $32,000. As the table on page 7 shows, gas volumes
increased 2% and oil volumes declined 9%. The net effect of these
volume changes was to reduce oil and gas sales by $22,000. The
decline in oil volume was due primarily to the divesture of marginal
wells in the second quarter of last year. Operating income decreased
as a result of the sale of the marginal wells, most of which were
operated by the company. Interest and other income increased in the
current quarter due to higher yields on temporary cash investments.
Total costs and expenses were $444,000 in the first quarter of
1996, up 5% from the $424,000 in the same period last year. General
and administrative expenses increased to $158,000 from $139,000
reflecting higher costs from inflationary pressures and unusually low
expenses in the first quarter of last year. Depreciation, depletion
and amortization was $131,000 compared to $141,000 last year
reflecting the lower production volumes discussed above. The 7%
increase in oil and gas production expenses reflects additions to well
ownership interests and several major well workovers in the first
quarter of 1996 compared to last year.
Income taxes were provided at 35% in both quarters.
<PAGE>
<PAGE>
Quarter Ended January 31, 1996 Compared to Quarter Ended October 31,
1995
In the first quarter of 1996, net income was $42,000 compared to an
$89,000 in the fourth quarter of 1995.
Total revenues decreased 4% to $508,000 compared to $529,000 in the
immediately preceding quarter. Oil and gas sales decreased $13,000,
or 4%, in the first quarter. Gas price realizations fell 18% due
primarily to a $.20 per Mcf hedging loss recorded in the first quarter
of 1996 compared to a $.35 hedging gain in the fourth quarter of 1995.
Refer to pages 6 and 7 for a more detailed discussion of gas price
hedging and the resulting gains and losses. As the table on page 7
shows, oil price realizations increased 6% to $16.88 per barrel. The
net effect of these price changes was to decrease oil and gas sales by
$28,000. As the table on page 7 shows, gas volumes increased 8% and
oil volumes increased 3%. The net effect of these volume changes was
to increase oil and gas sales by $15,000. Operating income increased
3% compared to last quarter. Interest and other income remained
virtually unchanged from the prior quarter.
Total costs and expenses increased 1% to $444,000 in the first
quarter of 1996 compared to $440,000 in the immediately preceding
quarter. General and administrative expenses decreased 6% reflecting
one time expenses incurred in the fourth quarter of last year.
Depreciation, depletion and amortization increased due to the higher
volume of oil and gas sales in the current quarter. Oil and gas
production costs and expenses were unchanged from the previous
quarter.
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: March 18, 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 CONSOILIDATED 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> 3-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 193,000
<SECURITIES> 2,458,000
<RECEIVABLES> 141,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,074,000
<PP&E> 10,760,000<F1>
<DEPRECIATION> 5,508,000
<TOTAL-ASSETS> 8,659,000
<CURRENT-LIABILITIES> 413,000
<BONDS> 0
<COMMON> 366,000
0
0
<OTHER-SE> 7,301,000
<TOTAL-LIABILITY-AND-EQUITY> 8,659,000
<SALES> 372,000
<TOTAL-REVENUES> 508,000
<CGS> 155,000
<TOTAL-COSTS> 289,000
<OTHER-EXPENSES> 158,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 64,000
<INCOME-TAX> 22,000
<INCOME-CONTINUING> 42,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,000
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<FN>
<F1>OIL AND GAS PROPERTIES, AT COST, USING FULL COST METHOD
</FN>
</TABLE>
