<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For Quarter Ended July 31, 1997
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 August 31,
1997: Common stock, $.10 par value - 3,042,000
Preferred stock, no par value - None issued
<PAGE>
CREDO PETROLEUM CORPORATION
Index to Form 10-Q
For Quarter Ended July 31, 1997
PART I - FINANCIAL INFORMATION (unaudited)
Consolidated Balance Sheets
As of July 31, 1997 and October 31, 1996
Consolidated Statements of Earnings and Changes in Retained
Earnings
For the Nine and Three Month Periods Ended July 31, 1997 and
1996
Consolidated Statements of Cash Flows
For the Nine Month Periods Ended July 31, 1997 and 1996
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Balance Sheets
A S S E T S
July 31, October 31,
1997 1996
-------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . $ 292,000 $ 344,000
Temporary cash investments . . . . . . . . . . . . 2,744,000 2,529,000
Receivables:
Trade. . . . . . . . . . . . . . . . . . . . . . 194,000 125,000
Accrued oil and gas sales. . . . . . . . . . . . 306,000 253,000
Accrued interest . . . . . . . . . . . . . . . . 3,000 6,000
Other. . . . . . . . . . . . . . . . . . . . . . . 30,000 30,000
----------- -----------
3,569,000 3,287,000
----------- -----------
OIL AND GAS PROPERTIES, at cost, full cost method:
Unevaluated. . . . . . . . . . . . . . . . . . . . 907,000 733,000
Evaluated. . . . . . . . . . . . . . . . . . . . . 4,863,000 4,903,000
----------- -----------
5,770,000 5,636,000
----------- -----------
LONG-TERM ASSETS:
Operating rights and other intangible assets, net. 161,000 226,000
Other, net . . . . . . . . . . . . . . . . . . . . 30,000 38,000
----------- -----------
191,000 264,000
----------- -----------
$9,530,000 $9,187,000
=========== ===========
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 . . . . . . . . . . . . . . . . . $ 536,000 $ 711,000
Income taxes payable . . . . . . . . . . . . . . . 2,000 6,000
----------- -----------
538,000 717,000
----------- -----------
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . 879,000 681,000
----------- -----------
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. . . . . . . . . . . . . . . . . 2,568,000 2,200,000
Treasury stock, at cost, 624,000 shares in 1997
and 601,000 in 1996 . . . . . . . . . . . . . . . (1,057,000) (1,013,000)
----------- -----------
8,113,000 7,789,000
----------- -----------
COMMITMENTS. . . . . . . . . . . . . . . . . . . . .
----------- -----------
$9,530,000 $9,187,000
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Statements of Earnings And Changes in
Retained Earnings - Unaudited
Nine Months Nine Months Quarter Quarter
Ended Ended Ended Ended
July 31, July 31, July 31, July 31,
1997 1996 1997 1996
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales. . . $1,570,000 $ 1,238,000 $ 411,000 $ 440,000
Operating. . . . . . . 332,000 310,000 110,000 104,000
Interest and other . . 179,000 112,000 93,000 32,000
---------- ----------- ------------ ---------
2,081,000 1,660,000 614,000 576,000
---------- ----------- ------------ ---------
COSTS AND EXPENSES:
General & administrative 471,000 459,000 160,000 153,000
Depreciation, depletion &
amortization. . . . . 450,000 422,000 150,000 146,000
Oil and gas production 594,000 548,000 194,000 204,000
---------- ----------- ------------ ----------
1,515,000 1,429,000 504,000 503,000
---------- ----------- ------------ ----------
INCOME BEFORE
INCOME TAXES . . . . . 566,000 231,000 110,000 73,000
INCOME TAXES . . . . . . (198,000) (81,000) (38,000) (26,000)
---------- ----------- ------------ ----------
NET INCOME . . . . . . . 368,000 150,000 72,000 47,000
RETAINED EARNINGS,
BEGINNING OF PERIOD . 2,200,000 1,940,000 2,496,000 2,043,000
---------- ----------- ----------- ----------
RETAINED EARNINGS,
END OF PERIOD. . . . . $2,568,000 $2,090,000 $2,568,000 $2,090,000
========== =========== ========== ==========
NET INCOME PER SHARE . . $ .12 $ .05 $ .02 $ .02
========== =========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING DURING
THE PERIOD . . . . . . 3,054,000 3,114,000 3,043,000 3,098,000
========== =========== ========== ==========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Nine Months Ended
July 31,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . $ 368,000 $ 150,000
Noncash expenses included in net income:
Depreciation, depletion and amortization . . . . 450,000 422,000
Deferred income taxes . . . . . . . . . . . . . 198,000 81,000
Other. . . . . . . . . . . . . . . . . . . . . . 14,000 12,000
Changes in assets and liabilities:
Trade receivables . . . . . . . . . . . . . . . (69,000) (27,000)
Accrued oil and gas sales. . . . . . . . . . . . (53,000) (58,000)
Accrued interest . . . . . . . . . . . . . . . . 3,000 -
Other . . . . . . . . . . . . . . . . . . . . . - (42,000)
Accounts payable . . . . . . . . . . . . . . . . (175,000) (23,000)
Income taxes payable . . . . . . . . . . . . . . (4,000) -
--------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . 732,000 515,000
--------- -----------
INVESTING ACTIVITIES:
Oil and gas properties, net . . . . . . . . . . . (520,000) (361,000)
Purchase of certificates of deposit and other
investments. . . . . . . . . . . . . . . . . . .(1,059,000) (1,499,000)
Proceeds from certificates of deposit and
other investments . . . . . . . . . . . . . . . 844,000 1,584,000
Changes in long-term assets. . . . . . . . . . . (5,000) (2,000)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . (740,000) (278,000)
---------- -----------
FINANCING ACTIVITIES:
Purchase of treasury stock . . . . . . . . . . . . (44,000) (130,000)
---------- -----------
NET CASH USED BY FINANCING ACTIVITIES. . . . . . . . (44,000) (130,000)
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . (52,000) 107,000
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD . . . . . . . . . . . . . . . 344,000 130,000
---------- -----------
END OF PERIOD. . . . . . . . . . . . . . . . . . . . $ 292,000 $ 237,000
========== ===========
See accompanying notes.
</TABLE>
<PAGE>
CREDO PETROLEUM CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
July 31, 1997
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital and cash flow represent a
significant capital resource and source of liquidity.
At July 31, 1997, working capital was $3,031,000, up 18%
from October 31, 1996. Cash flow from operating activities
before working capital changes totaled $1,030,000 for the nine
months. Cash flow was used primarily to fund net oil and gas
property expenditures and purchases of certificates of deposit
and treasury stock.
Existing working capital and anticipated cash flow are
expected to be sufficient to fund fiscal 1997 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.
Commitments for future capital expenditures were not
material at second 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.
Gas price decontrol, the advent of an active spot market for
natural gas, and increased commodity market trading have resulted
in gas prices received by the company being subject to
significant monthly fluctuations. Gas prices generally
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 and other foreign producers
exercise considerable influence over the worldwide oil supply
which in turn affects prices for petroleum products.
<PAGE>
The company periodically hedges the price of its oil and gas
production. Hedging transactions relate to anticipated
production volumes and generally take the form of forward, or
short, selling all or part of such volumes in the futures market.
Hedges are generally 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 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 recorded as adjustments to oil and
gas sales as the hedged product is produced.
The company's hedging decisions are based on a number of
very subjective factors which include its oil and gas price
outlook, futures market prices available to implement a hedge,
and maintenance of historical cash and futures market price
relationships. At July 31, 1997, the company had pre-sold,
through December 1998, 300,000 MMBtu of its future gas production
in the gas futures market at an average NYMEX price of $2.30 per
MMBtu.
Oil and gas sales volume and price comparisons for the
indicated periods are set forth below.
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended July 31, 1997 Ended July 31, 1996 Percent Percent
--------------------------------------- Volume Price
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 416,700 $ 2.26 409,700 $ 1.56(1) + 2% + 45%
Oil (bbls) 30,200 $ 20.81 31,700 $ 18.87 - 5% + 10%
Three Months Three Months
Ended July 31, 1997 Ended July 31, 1996 Percent Percent
------------------- ------------------- Volume Price
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 128,800 $ 1.79 141,900 $ 1.66 - 9% + 8%
Oil (bbls) 9,700 $ 18.65 10,300 $ 19.95 - 6% - 7%
Three Months Three Months
Ended July 31, 1997 Ended April 30, 1997 Percent Percent
------------------- -------------------- Volume Price
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
Gas (Mcf) 128,800 $ 1.79 144,500 $ 1.91 - 11% - 6%
Oil (bbls) 9,700 $ 18.65 10,200 $ 19.99 - 5% - 7%
(1) Includes a $.06 per Mcf hedging loss.
</TABLE>
<PAGE>
The gas volume decline in the three months ended July 31,
1997 was caused because the company's largest producing well,
Bear Creek Unit, was shut-in during two months of the quarter for
an expected workover involving installation of coil tubing.
Procedures prior to the installation disclosed significant
downhole equipment configuration problems at about 13,000 feet
which had to be remedied prior to the installation. At September
12, 1997, the downhole equipment problems had been remedied and
the coil tubing had been installed and was being positioned for
optimum performance. Subsequent workover procedures will include
artificially removing fluids induced during the workover until
the well can produce naturally. Management believes that the
well will be returned to production at expected levels. However,
there are always risks that the well will not respond as expected
to the workover which includes the risk that production cannot be
re-established at economic rates. The company owns 52.2% of the
property and it is the company's largest producing property. The
company's share of the well accounted for 14% of the company's
fiscal 1996 production and about 9% of the company's fiscal year
end 1996 reserves. Bear Creek Unit is primarily a gas property
with associated condensate. It is a mature property discovered
in the 1960s and has produced over six billion cubic feet of gas
and 500,000 barrels of oil.
The interest rate earned on short-term investments averaged
approximately 5.8% and 5.9% for the nine months ended July 31,
1997 and 1996, respectively. For the third quarter, the rate
averaged 5.8% compared to 5.4% for the same quarter last year and
5.8% in the immediately proceeding quarter. Current interest
rates available to the company are approximately 6.0%.
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.
<PAGE>
RESULTS OF OPERATIONS
Nine Months Ended July 31, 1997 Compared to Nine Months Ended
July 31, 1996
For the first nine months of 1997, net income was $368,000,
up 145% compared to $150, 000 last year. The improved results
were driven by higher natural gas prices and increased
production.
Total revenues increased 25% to $2,081,000 in the first nine
months of 1997 compared to $1,660,000 in the same period last
year. Oil and gas sales increased $332,000, or 27%. Refer to
the table on page 7 for details of oil and gas prices and volumes
for the applicable periods. Total gas price realizations, which
reflect the effect of hedging transactions, increased to $2.26
per Mcf in 1997 compared to $1.56 per Mcf last year. Hedging
transactions resulted in a $.06 per Mcf loss in the prior year
period. Oil price realizations rose 10% to $20.81 per barrel.
The net effect of these product price changes was to increase oil
and gas sales by $348,000. Gas volumes increased 2% and oil
volumes declined 5%. The net effect of these volume changes was
to decrease oil and gas sales by $16,000. Operating income
increased as a result of additional operated wells added through
drilling and acquisitions. Interest and other income increased
due to improved performance on certain of the company's managed
investments.
Total costs and expenses were $1,515,000 in the first nine
months of 1997 up 6% from the $1,429,000 in the same period last
year. General and administrative expenses increased due to
inflationary pressures and the timing of certain expenditures.
Depreciation, depletion and amortization increased due to higher
production levels and increases in the pool of costs being
amortized. The increase in oil and gas production expenses
reflects additional operating costs associated with recently
acquired properties and higher production taxes which are based
on higher oil and gas revenues.
Income taxes were provided at 35% in both periods.
Quarter Ended July 31, 1997 Compared to Quarter Ended July 31,
1996
In the third quarter of fiscal 1997, net income was $72,000,
up 53% compared to $47,000 in the same period last year.
Total revenues increased 7% to $614,000 in the third quarter
of 1997 compared to $576,000 in the same period last year. Oil
and gas sales decreased 7% to $411,000. Refer to the table on
page 7 for details of oil and gas prices and volumes for the
applicable periods. Total gas price realizations increased 8% to
$1.79 Mcf in 1997 compared to $1.66 last year. Oil price
realizations decreased 6% to $18.65 per barrel compared to $19.95
last year. The net effect of these price changes was to increase
oil and gas sales by $5,000. Gas volumes decreased 9% and oil
volumes declined 6%. The gas volume decline was caused because
the company's largest producing well was shut-in during two
months of the fiscal 1997 quarter for an expected workover as
described in the Product Prices, Production, and Interest Rates
section on page 7. The net effect of these volume changes was to
decrease oil and gas sales by $34,000. Operating income
increased as a result of additional operated wells added through
drilling and acquisitions. Interest and other income increased
due to improved performance of the company's managed investments.
<PAGE>
Total costs and expenses were $504,000 in the third quarter
of 1997, unchanged from the same period last year. General and
administrative expenses increased due to inflationary pressures
and the timing of certain expenditures. Depreciation, depletion
and amortization increased slightly despite the production volume
decline in the current quarter primarily because DD&A is an
annualized calculation based on estimated production, reserves
and costs at fiscal year-end. The decrease in oil and gas
production expenses reflects last year's higher level of remedial
work.
Income taxes were provided at 35% in both quarters.
Quarter Ended July 31, 1997 Compared to Quarter Ended April 30,
1997
In the third quarter of fiscal 1997, net income was $72,000,
down 20% compared to $90,000 in the prior quarter.
Total revenues decreased 3% to $614,000 in the second quarter
compared to $636,000 in the prior quarter. Oil and gas sales
decreased 14% to $411,000. Refer to the table on page 7 for
details of oil and gas prices and volumes for the applicable
periods. Total gas price realizations decreased 6% to $1.79 per
Mcf compared to $1.91 last quarter. Oil price realizations
decreased 7% to $18.65 per barrel compared to $19.99 in the prior
quarter. The net effect of these price changes was to decrease
oil and gas sales by $32,000. Gas volumes decreased 11% and oil
volumes declined 5%. The gas volume decline was caused because
the company's largest producing well was shut-in during two
months of the July 1997 quarter for an expected workover as
described in the Product Prices, Production, and Interest Rates
section on page 7. The net effect of these volume changes was to
decrease oil and gas sales by $36,000. Operating income remained
virtually unchanged. Interest and other income increased due to
improved performance on certain of the company's managed
investments.
Total costs and expenses were $504,000 in the third quarter
of 1997 compared to $497,000 in the immediately preceding
quarter. General and administrative expenses was substantially
the same in the two quarters. Depreciation, depletion and
amortization was approximately the same as the prior quarter
despite the production volume decline in the current quarter
primarily because DD&A is an annualized calculation based on
estimated production, reserves and costs at fiscal year-end. Oil
and gas production costs increased principally due to the quarter
to quarter timing of workovers and repairs.
Income taxes were provided at 35% in both quarters.
<PAGE>
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: September 15, 1997 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-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 292,000
<SECURITIES> 2,744,000
<RECEIVABLES> 503,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,569,000
<PP&E> 12,045,000
<DEPRECIATION> 6,275,000
<TOTAL-ASSETS> 9,530,000
<CURRENT-LIABILITIES> 538,000
<BONDS> 0
<COMMON> 366,000
0
0
<OTHER-SE> 7,747,000
<TOTAL-LIABILITY-AND-EQUITY> 9,530,000
<SALES> 1,570,000
<TOTAL-REVENUES> 2,081,000
<CGS> 594,000
<TOTAL-COSTS> 1,044,000
<OTHER-EXPENSES> 471,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 566,000
<INCOME-TAX> 198,000
<INCOME-CONTINUING> 368,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 368,000
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
