<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
- --- For The Fiscal Year Ended October 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period to
------------- -------------
Commission File Number 0-8877
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CREDO PETROLEUM CORPORATION
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(Exact name of registrant as specified in charter)
Colorado 84-0772991
(State of incorporation) (I.R.S. employer identification number)
1801 Broadway, Suite 900, Denver, Colorado 80202-3837
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (303) 297-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
3,065,137 Shares Outstanding, Net of Treasury Stock,
at the Close of Business on December 31, 1996
(Title of class and shares outstanding)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
-----
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
----- -----
As of December 31, 1996, the aggregate market value of common stock held by
non-affiliates of the registrant was approximately $4,663,000.
DOCUMENTS INCORPORATED BY REFERENCE into Part III hereof - Proxy Statement to
be filed with the Commission in connection with the company's 1997 Annual
Meeting.
<PAGE>
PART I.
ITEM 1. BUSINESS
General
CREDO Petroleum Corporation ("CREDO") was incorporated in Colorado in 1978.
CREDO and its wholly owned subsidiaries, SECO Energy Corporation and United
Oil Corporation ("SECO", "United" and collectively "the company"), are Denver,
Colorado based independent oil and gas companies which engage in oil and gas
acquisition, exploration, development and production activities mostly in the
Mid-Continent and Rocky Mountain regions of the United States. The company
operates in nine states and has nine employees. References to years as used
in this report indicate fiscal years ended October 31.
In 1988, CREDO purchased all of the outstanding stock of United, then an
Oklahoma City based oil and gas exploration and production company. United
operates exclusively in Oklahoma. In 1987, CREDO purchased all of the
outstanding common stock of SECO, then a Casper, Wyoming based oil and gas
company. SECO is primarily a royalty company with both developed and
undeveloped property interests in major producing basins in the Rocky Mountain
Region. Both United and SECO are now based in Denver, Colorado and operate as
separate corporations and hold property title in their respective corporate
names.
The company's primary business activities are (i) oil and gas production, (ii)
operations of oil and gas properties for the company's interest and for the
interests of third parties, (iii) purchasing producing oil and gas properties,
and (iv) exploration for and development of oil and gas reserves.
Oil and Gas Operations
Operations are conducted primarily in the Mid-Continent and Rocky Mountain
regions of the United States. The company owns producing and non-producing
property interests in nine states.
The company's staff oversees the operations of existing properties and
evaluates property acquisition opportunities and drilling prospects.
Operations are concentrated on shallow to medium depth properties generally
ranging from 5,000 to 9,500 feet. A portion of the funds necessary for
acquisition, exploration or development of properties is raised through
farmouts, joint ventures, or other similar types of cost sharing arrangements.
Involvement of outside participants reduces the company's return on individual
successful ventures. However, it limits the company's risk from unsuccessful
ventures and provides exposure to a larger volume of activities than would
otherwise be possible.
The company acts as "operator" of 86 wells pursuant to standard industry
Operating Agreements. In addition, the company is general partner of three
private limited partnerships. The Partnerships are in the production stage of
operations.
Markets and Customers
Marketing of the company's oil and gas production is influenced by many
factors which are beyond the company's control and the exact effect of which
cannot be accurately predicted. These factors include changes in supply and
demand, changes in market prices, regulatory changes, and actions of major
foreign producers.
<PAGE>
The company sells its oil production to crude oil purchasing companies at
competitive field prices. Crude oil and condensate production are readily
marketable. Crude oil is cost efficiently transportable from production
centers to demand centers and is, therefore, subject to world-wide supply and
demand. Oil prices are primarily dependent upon available oil supplies which
can vary significantly depending on production and pricing policies of OPEC
and other major producing countries and on significant events in major
producing regions such as the Persian Gulf War in 1991.
Deregulation of natural gas pricing and transportation have resulted in
far-reaching and fundamental changes in the producing, 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 prices
received by the company being subject to significant fluctuations. Prices
tend to rise in peak demand periods such as fall and winter and to decline
during lower demand periods. The company presently sells most of its gas
through short-term contracts with terms of one year or less which are designed
to obtain the best available prices and deliverabilities. Virtually all of
the company's gas contracts provide for prices based on monthly spot prices
for the applicable market area. These prices are reduced ("netted") by the
costs of gathering and transporting the gas.
The company periodically hedges the price of a portion of its natural gas and
crude oil production by forward selling in the futures markets. Information
concerning hedging activities is contained in Note (1) to the Consolidated
Financial Statements.
Information concerning the company's major customers is included in Note (5)
to the Consolidated Financial Statements. The company's ability to market its
oil and gas is generally not dependent on a single purchaser.
Refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further information regarding oil and gas markets
and prices.
Competition and Regulation
The oil and gas industry is intensely competitive. The company competes with
larger more well established oil and gas companies including, on occasion,
major companies. The significant areas of competition are in acquiring oil
and gas reserves, acquiring leases for drilling or development, and selling
natural gas. The primary competitive factors for acquisitions are the price
the company is willing to pay and the financial resources readily available to
the company to fund acquisitions. The primary factors which affect the
company's ability to sell its natural gas include proximity to markets,
proximity to and capacity of natural gas pipelines and transportation and
processing facilities, and quantities of gas which can be aggregated for sale.
Although both oil and gas are generally readily saleable at market prices,
they compete for market share with each other and with other energy sources
such as coal and nuclear power.
Oil and gas drilling and production operations are regulated by various
Federal, state and local agencies. These agencies issue binding rules and
regulations which increase the company's cost of doing business and which
carry penalties, often substantial, for failure to comply. It is anticipated
that the aggregate burden on the company of Federal, state and local
regulation will continue to increase particularly in the area of rapidly
<PAGE>
changing environmental laws and regulations. The company believes that its
present operations substantially comply with applicable regulations. To date,
such regulations have not had a material effect on the company's operations,
or the costs thereof. There are no known environmental or other regulatory
matters related to the company's operations which are reasonably expected to
result in material liability to the company. The company does not believe
that capital expenditures related to environmental control facilities or other
regulatory matters will be material in fiscal 1997.
No prediction can be made as to what legislation or regulations may be enacted
or what additional legislation or regulations may be proposed.
ITEM 2. PROPERTIES
General
During 1996, the company participated in drilling and new zone completions on
three oil wells and three gas wells located in Oklahoma and Wyoming of which
four were successful and two were dry holes. The company also expanded its
producing property base by purchasing new or additional interests in 44 wells
located in Oklahoma and Wyoming. These activities added nine wells to the
operated properties managed by the company. Undeveloped acreage was acquired
mostly in gas-prone areas of Southwest Wyoming. Capital expenditures for oil
and gas activities totaled $817,000 in 1996.
During 1995, the company participated in drilling and new zone recompletions
on six gas wells and three oil wells located in Oklahoma and Wyoming of which
seven were successful and two resulted in dry holes. The company purchased
new or additional interests in 48 wells located mostly in areas of Oklahoma
where it has existing operations. Undeveloped acreage was acquired mostly in
areas of Wyoming and Utah which are known for natural gas reserve potential.
Total 1995 property expenditures were $710,000. During the year, the company
sold its interest in 34 marginally economic wells all of which were company
operated. In addition, the company sold, or farmed out for drilling, its
interest in several undeveloped leases. Sales proceeds received totaled
$191,000.
During 1994, the company purchased interests in 48 producing wells in Oklahoma
including a 7% interest in 13 gas wells located in the Southfork Field of
Woods County, Oklahoma. In addition, the company participated, with interests
ranging up to 50%, in drilling three gas wells in Oklahoma all of which were
successful. The company also purchased acreage on approximately 15 gas
drilling prospects in Oklahoma and four gas drilling prospects in southwest
Wyoming. Total 1994 property expenditures were $1,065,000.
Approximately 75% of the value of the company's estimated reserves is
represented by 46 producing properties which are located in 31 separate fields
in six states. The most significant producing property is Bear Creek Field
located in Converse County, Wyoming, in which the company owns a 52.2% working
interest. The company's share of 1996 production from this one-well field was
1,350 barrels of oil and 93 million cubic feet of gas. The company's share of
estimated proved developed reserves attributable to the field at November 1,
1996 was 9,000 barrels of oil and 681 million cubic feet of gas and represents
approximately 9% of year-end reserve quantities and 10% of year-end reserve
values. Bear Creek Field is primarily a gas property with associated
condensate production. It is a mature property having produced over six
billion cubic feet of gas and 500,000 barrels of oil over its thirty year
life.
<PAGE>
Estimated Proved Oil and Gas Reserves and Future Net Revenues
In 1996, 1995 and 1994, McCartney Engineering, Inc., an independent petroleum
engineering firm, estimated proved reserves for the company's significant
properties which represented 60%, 60% and 61%, respectively, of the total
estimated future value of estimated reserves. Remaining reserves were estimated
by the company in all years.
At October 31, 1996, oil represented 27% and natural gas represented 73% of
total reserves denominated in equivalent barrels using a six Mcf of gas to one
barrel of oil conversion ratio.
The following table sets forth, as of October 31 of the indicated year,
information regarding the company's proved reserves which is based on the
assumptions set forth in Note (5) to the Consolidated Financial Statements where
additional reserve information is provided. The average price used to calculate
estimated future net revenues was $23.96, $16.31 and $16.22 per barrel for oil
and $2.39, $1.34 and $1.38 per Mcf for gas as of October 31, 1996, 1995 and
1994, respectively. Amounts do not include estimates of future Federal and
state income taxes.
<TABLE>
<CAPTION>
Estimated Future
Oil Gas Estimated Future Net Revenues
Year (bbls) (Mcf) Net Revenues Discounted at 10%
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 364,000* 5,816,000* $14,562,000 $8,776,000
1995 363,000* 5,364,000* $ 7,781,000 $4,842,000
1994 363,000* 5,188,000* $ 7,877,000 $4,885,000
<FN>
* Of 1996, 1995 and 1994 amounts, proved developed reserves were 334,000,
363,000 and 363,000 barrels of oil and 5,048,000, 5,112,000 and 4,936,000
Mcf of gas, respectively.
</TABLE>
Production, Average Sales Prices and Average Production Costs
The company's net production quantities and average sales price per unit
for the indicated years are set forth below.
<TABLE>
<CAPTION>
1996 1995 1994
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Product Volume Price Volume Price Volume Price
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 550,000 $ 1.59* 458,000 $ 1.65* 403,000 $ 1.66
Oil (bbls) 42,000 $19.77 45,000** $16.43 49,000 $14.86
<FN>
* Includes gas hedging losses of $.04 per Mcf in 1996 and gas hedging gains
totaling $.35 per Mcf in 1995.
** Decline in oil production mostly due to sale of 34 marginal oil wells during
the year.
</TABLE>
Average production costs, including production taxes, per unit of production
(using a six to one conversion ratio of Mcfs to barrels) were $5.17, $5.13 and
$5.15 per barrel in 1996, 1995 and 1994, respectively.
Productive Wells and Developed Acreage
Developed acreage at October 31, 1996 totaled 16,800 net and 87,000 gross
acres. At October 31, 1996, the company owned working interests in 50.05 net
(161 gross) wells consisting of 24.36 net (58 gross) oil wells and 25.69 net
(103 gross) gas wells. In addition, the company owned royalty and production
payment interests in approximately 171 oil and gas wells. In 1996, the company
divested of 1.04 net (2 gross) wells. In the same period, the company acquired
interests in 6.28 net (25 gross) wells in which it did not previously own an
interest and 3.63 net (19 gross) wells where the company previously owned an
interest.
<PAGE>
Undeveloped Acreage
The following table sets forth the number of undeveloped acres which will expire
during the next five fiscal years (and thereafter) unless production is
established in the interim. Undeveloped acres "held-by-production" represent
the undeveloped portions of producing leases which will not expire until
commercial production ceases. A "Net Royalty Acre" is the equivalent of a 12.5%
royalty or production payment interest in one net working interest acre under
lease.
<TABLE>
<CAPTION>
Working
Royalty Interest Acreage Interest Acreage
- -------------------------------------------------------------------------------
Expiration Net
Year Ending Royalty
October 31 Gross Net Acres Gross Net
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<S> <C> <C> <C> <C> <C>
1997 - - - 1,500 1,200
1998 - - - 1,300 300
1999 7,000 7,000 100 6,400 2,600
2000 - - - 3,800 1,500
2001 - - - 1,000 900
Thereafter 5,300 5,300 100 47,600 14,800
Held-By-Production 105,400 84,300 7,700 11,800 2,600
- ------------------------------------------------------------------------------
117,700 96,600 7,900 73,400 23,900
==============================================================================
</TABLE>
The acreage in the above table is located in nine states including Oklahoma,
Texas, Colorado, Wyoming, North Dakota and Utah.
Royalty and production payment interests are referred to collectively as royalty
interests. In general, "royalty" and "production payment" interests are
nonoperated interests which are not burdened by costs of exploration or lease
operations, while "working interests" have operating rights and participate in
such costs. Operating rights in leases underlying the company's royalties are
held by others and, therefore, the company cannot compel exploration or
development of the leases nor can it control costs of operations.
Drilling and New Zone Recompletions
The following tables set forth the number of gross and net oil and gas wells in
which the company has participated in drilling or new zone recompletions and the
results thereof for the periods indicated.
<TABLE>
<CAPTION>
Gross Wells
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Year Ended Total Gross Exploratory Development
-------------------- ------------------
October 31 Wells Oil Gas Dry Oil Gas Dry
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<S> <C> <C> <C> <C> <C> <C> <C>
1996 6 2 1 2 - 1 -
1995 9 2 2 2 - 3 -
1994 3 - 1 - - 2 -
1978-1993 120 7 24 67 15 3 4
- ------------------------------------------------------------------------------
138 11 28 71 15 9 4
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Net Wells
- ------------------------------------------------------------------------------
Year Ended Total Net Exploratory Development
-------------------- ------------------
October 31 Wells Oil Gas Dry Oil Gas Dry
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1.381 .460 .472 .213 - .235 -
1995 2.168 .150 .475 .975 - .568 -
1994 .616 - .500 - - .116 -
1978-1993 19.141 .791 2.776 9.505 4.350 .235 1.485
- -------------------------------------------------------------------------------
23.306 1.401 4.223 10.693 4.350 1.154 1.485
===============================================================================
</TABLE>
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The company is not a party to any material pending legal proceedings. No such
proceedings have been threatened and none are contemplated by the company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996
PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The company's common stock is traded on the National Association of Securities
Dealers Automated Quotation System under the symbol "CRED". Market quotations
shown below were reported by the National Association of Securities Dealers,
Inc. and represent prices between dealers excluding retail mark-up or
commissions.
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------
Fiscal Quarter Ended High Low High Low
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
January 31 $1.75 $1.50 $1.75 $1.56
April 30 1.88 1.63 1.88 1.63
July 31 2.06 1.63 1.88 1.63
October 31 2.00 1.50 1.75 1.50
</TABLE>
At December 31, 1996, the company had 4,655 shareholders of record. The company
has never paid a dividend and does not expect to pay any dividends in the
foreseeable future. Earnings are reinvested in business activities.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
October 31 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $2,287,000 $2,129,000 $1,931,000 $2,123,000 $2,064,000
Net income (loss)
before accounting
change and
extraordinary item 260,000 251,000 150,000 (375,000)* (126,000)*
Net income (loss) 260,000 251,000 150,000 (576,000)** (126,000)
Per share amounts:
Before tax
accounting change $.08 $.08 $.05 $(.11)* $(.04)*
After tax
accounting change .08 .08 .05 (.17)** (.04)
Total assets $9,187,000 $8,718,000 $9,150,000 $8,447,000 $9,159,000
Long-term debt - - - - -
stockholders'
equity 7,789,000 7,688,000 7,615,000 7,577,000 8,235,000
<FN>
* Includes a $556,000, net of tax, non-cash write-down in the carrying value
of oil and gas properties in 1993, and a $280,000 write-down in 1992.
** In addition to the non-cash write-down discussed above, 1993 includes a one
time, non-cash accounting charge of $201,000 for the effect of adopting
Statement of Financial Standards No. 109, Accounting for Income Taxes.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The company's working capital and cash flow represent a significant capital
resource and source of liquidity. At fiscal year-end, October 31, 1996, working
capital was $2,570,000. Cash generated by operating activities totaled
$1,143,000 in 1996. Working capital and cash flow were used primarily to fund
oil and gas acquisition and development expenditures totaling $817,000 and to
purchase 94,000 shares of treasury stock for $159,000.
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 acquisitions during the coming year, issuance of additional stock,
bank borrowings or other forms of debt financing might be considered. At fiscal
year-end, the company had no lines of credit or other bank financing
arrangements. 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 fiscal
year-end. The timing of most capital expenditures for exploration and
development is relatively discretionary. Therefore, the company can normally
plan expenditures to coincide with available funds.
The company has no defined benefit plans and no obligations for post retirement
employee benefits.
Product Prices, Production and Interest Rates
Numerous uncertainties exist in the oil and gas industry which could adversely
affect the company and 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 producing,
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 gas prices received by the company being subject to significant
fluctuations. Prices tend to rise in peak demand periods such as the fall and
winter, and to decline during lower demand periods.
Uncertainties also exist with respect to the supply of oil available to world
markets. OPEC and world events such as the Persian Gulf War significantly
influence world-wide supply and prices for petroleum products.
Volatile gas and oil prices have increasingly become a reality for the energy
business. 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. Since 1991, the company has occasionally
hedged product prices by forward selling a portion of its production in the
NYMEX futures market. This is done when the price relationship (the "basis")
between the futures markets and the cash markets where the company sells its gas
is stable within historical ranges, and when, in the company's opinion, the
current price of a product is adequate to insure reasonable returns and downside
price risks appear to be substantial. The company closes its hedges by
purchasing offsetting "long" positions in the futures market at then prevailing
prices. Accordingly, the gain or loss on the hedge position will depend on
futures prices at the time offsetting "long" positions are purchased. Hedging
gains and losses are included in revenues from oil and gas sales.
During fiscal 1995, the company hedged a substantial portion of its gas
production. Hedging gains for fiscal 1995 totaled $161,000, or $.35 per Mcf of
gas produced, while in 1996 a hedging loss was incurred totaling $25,000, or
$.04 per Mcf produced.
<PAGE>
In the first quarter of fiscal 1996, the basis differential between the NYMEX
futures market and the company's Mid-Continent and Rocky Mountain cash markets
unexpectedly expanded causing the company to close all hedge positions. The
company did not enter into any significant hedges after the first quarter of
1996, and its ability and/or willingness to hedge in the future is presently
uncertain due primarily to basis risk and market volatility.
Oil and gas sales volume and price comparisons for the indicated years ended
October 31 are set forth below.
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------
Product Volume Price Volume Price Volume Price
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 550,000 $ 1.59* 458,000 $ 1.65* 403,000 $ 1.66
Oil (bbls) 42,000 $19.77 45,000** $16.43 49,000 $14.86
<FN>
* Includes gas hedging loss of $.04 per Mcf in 1996 and gas hedging gains
totaling $.35 per Mcf in 1995.
** Decline in oil production due to sale of 34 marginal oil wells during the
year.
</TABLE>
The average interest rate earned on short-term investments was 5.8% in 1996,
6.4% in 1995, and 4.1% in 1994. Current interest rates available to the company
have not changed significantly.
Acquisitions and Exploration
During 1996, the company participated in drilling and new zone completions on
three oil wells and three gas wells located in Oklahoma and Wyoming of which
four were successful and two were dry holes. The company also expanded its
producing property base by purchasing new or additional interests in 44 wells
located in Oklahoma and Wyoming. These activities added nine wells to the
operated properties managed by the company. Undeveloped acreage was acquired
mostly in gas-prone areas of Southwest Wyoming. Capital expenditures for oil
and gas activities totaled $817,000 in 1996.
During 1995, the company participated in drilling and new zone recompletions on
six gas wells and three oil wells located in Oklahoma and Wyoming of which seven
were successful and two resulted in dry holes. The company purchased new or
additional interests in 48 wells located mostly in areas of Oklahoma where it
has existing operations. Undeveloped acreage was acquired mostly in areas of
Wyoming and Utah which are known for natural gas reserve potential. Total 1995
property expenditures were $710,000. During the year, the company sold its
interest in 34 marginally economic wells all of which were company operated. In
addition, the company sold, or farmed out for drilling, its interest in several
undeveloped leases. Sales proceeds received totaled $191,000.
Results of Operations
In 1996, total revenues rose 7% to $2,287,000 compared to $2,129,000 in 1995
with oil and gas sales accounting for virtually all of the increase. As the
above oil and gas price/volume table shows, total gas price realizations, which
reflect the effect of hedging transactions, fell slightly to $1.59 Mcf and oil
price realizations rose 20% to $19.77 per barrel. The net effect of these price
changes was to increase oil and gas sales by $123,000. Net "wellhead" gas
prices received rose 25% to $1.63 per Mcf compared to $1.30 per Mcf last year.
Gas hedging activities generated losses of $.04 per Mcf in 1996 compared to
gains totaling $.35 per Mcf in 1995. Accordingly, total gas price realizations,
which include the effect of hedging transactions, fell slightly to $1.59 in 1996
per Mcf compared to $1.65 per Mcf last year. Gas volumes produced increased 20%
and oil volumes produced declined 7%. The net effect of these volume changes
was to increase oil and gas sales by $87,000. The gas volume increase was
primarily due to wells placed on stream late in fiscal 1995, production from new
acquisitions, and periodic shut-in of some large gas properties last year due
<PAGE>
primarily to low gas prices. The decline in oil volumes is mostly due to normal
production declines. Operating income increased slightly. Interest and other
income declined due to lower yields on cash investments and lower net returns on
the company's bond investments.
In 1995, total revenues rose 10% to $2,129,000 compared to $1,931,000 in 1994
with oil and gas sales accounting for 49% of the increase. As the above oil and
gas price/volume table shows, total gas price realizations fell slightly to
$1.65 per Mcf and oil price realizations rose 11% to $16.43 per barrel. The net
effect of these price changes was to increase oil and gas sales by $91,000. Net
"wellhead" gas prices fell 22% to $1.30 per Mcf compared to $1.66 per Mcf last
year. Gas hedging activities generated profits totaling $.35 per Mcf in 1995.
Accordingly, total gas prices realizations, which include the effect of hedging
transactions, were stable between the two periods in the $1.65 to $1.66 per Mcf
range. Gas volumes increased 14% and oil volumes declined 8%. The net effect
of these volume changes was to increase oil and gas sales by $6,000. The gas
volume increase was primarily due to wells placed on stream early in fiscal 1995
together with production from acquisitions made in the fourth fiscal quarter of
last year. Gas volume increases were partially offset by periodic shut-in of
some large gas properties during the year due primarily due to low gas prices.
The decline in oil volumes is mostly due to sale of 34 gross (17 net) marginal
oil wells during the year and loss of oil volumes associated with curtailed gas
production. Operating income increased slightly. Interest and other income
increased due to higher yields on temporary cash investments.
In 1996, total costs and expenses increased 8% to $1,886,000 compared to
$1,751,000 in 1995. Depreciation, depletion and amortization ("DD&A") for 1996
increased 9% compared to 1995 due primarily to a 10% increase in oil and gas
production. Oil and gas production expenses increased 11% due mostly to
additions of interests in 19 new wells and in 25 wells where the company already
owned an interest. General and administrative expenses increased 3% primarily
as a result of inflationary pressures on administrative costs. The effective
tax rate was approximately 35% in 1996 and 34% in 1995.
In 1995, total costs and expenses increased 3% to $1,751,000 compared to
$1,702,000 last year. DD&A increased 3% due primarily to increased
production resulting from acquisitions and drilling. Oil and gas production
expenses increased 4% due mostly to additions of interests in wells where the
company already owned an interest. General and administrative expenses
increased slightly primarily as a result of inflationary pressures on
administrative costs. The effective tax rate was approximately 34% in both
years.
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
Consolidated Balance Sheets, October 31, 1996 and 1995
Consolidated Statements of Operations for the Three Years Ended
October 31, 1996
Consolidated Statements of Stockholders' Equity for
the Three Years Ended October 31, 1996
Consolidated Statements of Cash Flows for the Three Years
Ended October 31, 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
October 31, 1996 and 1995
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------
Assets 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 344,000 $ 130,000
Temporary cash investments 2,529,000 2,580,000
Receivables:
Trade 143,000 129,000
Accrued oil and gas sales 235,000 169,000
Accrued interest 6,000 6,000
Other 30,000 34,000
- -----------------------------------------------------------------------------
3,287,000 3,048,000
- -----------------------------------------------------------------------------
Oil and gas properties, net, at cost,
using full cost method:
Unevaluated 733,000 709,000
Evaluated 4,903,000 4,601,000
- -----------------------------------------------------------------------------
5,636,000 5,310,000
- -----------------------------------------------------------------------------
Long-term assets:
Operating rights and other
intangible assets, net 226,000 312,000
Other, net 38,000 48,000
- -----------------------------------------------------------------------------
264,000 360,000
- -----------------------------------------------------------------------------
$9,187,000 $8,718,000
=============================================================================
Liabilities and Stockholders' Equity
- -----------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 711,000 $ 473,000
Income taxes payable 6,000 -
- -----------------------------------------------------------------------------
717,000 473,000
- -----------------------------------------------------------------------------
Deferred income taxes 681,000 557,000
- -----------------------------------------------------------------------------
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 2,200,000 1,940,000
Treasury stock, at cost, 601,000 shares in
1996 and 507,000 shares in 1995 (1,013,000) (854,000)
- -----------------------------------------------------------------------------
7,789,000 7,688,000
- -----------------------------------------------------------------------------
Commitments
- -----------------------------------------------------------------------------
$9,187,000 $8,718,000
=============================================================================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended October 31, 1996
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Oil and gas sales $1,703,000 $1,493,000 $1,396,000
Operating 421,000 416,000 414,000
Interest and other 163,000 220,000 121,000
- -----------------------------------------------------------------------------
2,287,000 2,129,000 1,931,000
- -----------------------------------------------------------------------------
Costs and expenses:
General and administrative 618,000 600,000 593,000
Depreciation, depletion and
amortization 577,000 529,000 512,000
Oil and gas production 691,000 622,000 597,000
- -----------------------------------------------------------------------------
1,886,000 1,751,000 1,702,000
- -----------------------------------------------------------------------------
Income before income taxes 401,000 378,000 229,000
Income taxes (141,000) (127,000) (79,000)
- -----------------------------------------------------------------------------
Net income $ 260,000 $ 251,000 $ 150,000
=============================================================================
Net income per share $.08 $.08 $ .05
=============================================================================
Weighted average common shares
outstanding during the period 3,104,000 3,203,000 3,308,000
=============================================================================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended October 31, 1996
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------
Capital In Total
Common Stock Excess Of Retained Treasury Stockholders'
----------------
Shares Amount Par Value Earnings Stock Equity
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances,
October 31, 1993 3,666,000 $366,000 $6,236,000 $1,539,000 $(564,000) $7,577,000
Purchase of treasury
stock - - - - (112,000) (112,000)
Net income - - - 150,000 - 150,000
- -------------------------------------------------------------------------------------------------
Balances,
October 31, 1994 3,666,000 366,000 6,236,000 1,689,000 (676,000) 7,615,000
Purchase of treasury
stock - - - - (178,000) (178,000)
Net income - - - 251,000 - 251,000
- -------------------------------------------------------------------------------------------------
Balances,
October 31, 1995 3,666,000 366,000 6,236,000 1,940,000 (854,000) 7,688,000
Purchase of treasury
stock - - - - (159,000) (159,000)
Net income - - - 260,000 - 260,000
- -------------------------------------------------------------------------------------------------
Balances,
October 31, 1996 3,666,000 $366,000 $6,236,000 $2,200,000 $(1,013,000) $7,789,000
=================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended October 31, 1996
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 260,000 $ 251,000 $ 150,000
Noncash expenses included in
net income:
Depreciation, depletion and
amortization 577,000 529,000 512,000
Deferred income taxes 124,000 127,000 123,000
Other 14,000 18,000 16,000
Changes in assets and liabilities:
Trade receivables (14,000) 16,000 82,000
Accrued oil and gas sales (66,000) 27,000 41,000
Accrued interest - 7,000 (7,000)
Other current assets 4,000 29,000 (35,000)
Accounts payable 238,000 (177,000) 162,000
Income taxes payable 6,000 - (75,000)
- -------------------------------------------------------------------------------
Net cash provided by operating activities 1,143,000 827,000 969,000
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Increase in oil and gas properties, net (817,000) (519,000)(1,065,000)
Purchases of certificates of deposit
and other investments (1,791,000) (1,475,000)(2,849,000)
Proceeds from certificates of deposit
and other investments 2,106,000 1,966,000 2,750,000
Investments in managed funds, net (264,000) (340,000) (347,000)
Other (4,000) (27,000) (13,000)
- -------------------------------------------------------------------------------
Net cash used in investing activities (770,000) (395,000)(1,524,000)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (159,000) (178,000) (112,000)
Proceeds from (payment of) short-term
note payable - (455,000) 455,000
- -------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (159,000) (633,000) 343,000
- -------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 214,000 (201,000) (212,000)
Cash and cash equivalents:
Beginning of year 130,000 331,000 543,000
- -------------------------------------------------------------------------------
End of year $ 344,000 $ 130,000 $ 331,000
===============================================================================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1996
CREDO PETROLEUM CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
The consolidated financial statements include the accounts of CREDO Petroleum
Corporation and its wholly owned subsidiaries (the "company"). The company
engages in oil and gas acquisition, exploration, development and production
activities in the United States. Certain operations are conducted through
three private limited partnerships (the "Partnerships") which, as general
partner, the company manages and controls. The company's general and limited
partner interests in the Partnerships are combined on the proportionate share
basis in accordance with accepted industry practice. All significant
intercompany transactions have been eliminated. Certain reclassifications
have been made to prior year amounts.
Financial Instruments
Cash equivalents include highly liquid investments with original maturities of
three months or less. Temporary cash investments include certificates of
deposit and other short-term investments which are reasonably expected to
mature, or to be liquidated, within twelve months. It is management's best
estimate that the carrying amount of all financial instruments approximates
their fair value due to the short maturity of said instruments.
Oil and Gas Properties
The company follows the full cost method of accounting for its oil and gas
operations. Under this method all costs incurred in the acquisition,
exploration, and development of oil and gas properties are capitalized in one
cost center, including certain internal costs directly associated with such
activities which totaled $108,000 in 1996 and 1995. Proceeds from sales of oil
and gas properties are credited to the cost center with no gain or loss
recognized unless such adjustments would significantly alter the relationship
between capitalized costs and proved oil and gas reserves. Estimated
dismantlement, restoration, and abandonment costs are approximately offset by
estimated residual values of lease and well equipment. Accordingly, no accrual
for such costs has been recorded.
If capitalized costs, less related accumulated amortization and deferred
income taxes, exceed the "full cost ceiling", the excess is expensed in the
period such excess occurs. The full cost ceiling includes an estimated
discounted value of future net revenues attributable to proved reserves using
current product prices and operating costs, and an estimate of the value of
unproved properties which are included in the cost center. Cost of oil and
gas properties are amortized using the units of production method. The
company's composite depreciation, depletion and amortization ("DD&A") rate per
equivalent barrel produced was $3.66 in 1996, $3.66 in 1995 and $3.68 in 1994.
<PAGE>
Unevaluated properties consist primarily of lease acquisition and maintenance
costs. Evaluation normally takes three to five years. Of the unevaluated
property costs, $108,000 and $145,000 were incurred in 1996 and 1995,
respectively.
Operating Rights and Other Intangible Assets
Operating rights represent contractual agreements designating the company to
conduct and supervise the day to day operations of a well in return for a
specified monthly fee. Amortization of purchased operating rights is based on
the relationship of the number of months of operations to the estimated
economic lives of the wells. Amortization was $85,000 in each of the three
years ended October 31, 1996. Accumulated amortization was $677,000 and
$592,000 at October 31, 1996 and 1995, respectively.
Natural Gas and Crude Oil Price Hedging
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 NYMEX
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 downward price movement occurs or if 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. Hedging losses totaled
$25,000 in 1996 and hedging gains totaled $161,000 in 1995.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Per Share Amounts
Per share amounts are computed on the basis of the weighted average number of
common shares outstanding during the year. The assumed exercise of stock
options is not included because the effect would be immaterial.
(2) COMMON STOCK AND PREFERRED STOCK
During fiscal 1996 and 1995, the company acquired 94,000 and 107,000 shares of
its common stock at a total cost of $159,000 and $178,000, respectively.
These transactions have been recorded as treasury stock.
<PAGE>
The company has authorized 5,000,000 shares of preferred stock which may be
issued in series and with preferences as determined by the company's Board of
Directors. Approximately 100,000 shares of the company's authorized but
unissued preferred stock have been reserved for issuance pursuant to the
provisions of the company's Shareholders' Rights Plan.
A non-qualified stock option plan approved by the company's shareholders,
authorizes granting of options to directors to purchase shares of common
stock. As of October 31, 1996, 210,000 shares had been reserved for issuance
under the plan. Options under the plan are granted at the fair market value
of the company's common stock on the date of grant. Options granted under the
plan become exercisable in annual increments of 25% beginning with the first
anniversary date of the grant and expire on the fifth anniversary date if
unexercised. There were no option transactions in 1996 or 1995. At October
31, 1996, options to purchase 50,000 shares were outstanding at $1.88 per
share and all such options were exercisable.
The Financial Accounting Standards Board has recently issued a statement which
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on fair value. The company does not presently intend to adopt such fair
value accounting but will make the related disclosures as required by the
statement.
(3) COMMITMENTS
The company leases office facilities under a five year lease agreement
effective January 1, 1996. The lease agreement requires payments of $40,000
in 1997 escalating ratably over five years to $45,000 in 2001. Total rental
expense in fiscal 1996, 1995 and 1994 was $42,000, $41,000 and $38,000,
respectively. The company has no capital leases and no other operating lease
commitments.
(4) INCOME TAXES
The company follows 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. Accordingly, income
tax provisions increase or decrease in the same year in which a change in tax
rates is enacted.
The income tax expense recorded in the Consolidated Statements of Operations
consists of the following:
<TABLE>
<CAPTION>
Years Ended October 31 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 124,000 $ - $ (44,000)
Deferred 17,000 127,000 123,000
- -----------------------------------------------------------------------------
$ 141,000 $ 127,000 $ 79,000
=============================================================================
</TABLE>
<PAGE>
The effective income tax rate differs from the U.S. Federal statutory income
tax rate due to the following:
<TABLE>
<CAPTION>
Years Ended October 31 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 34 % 34% 34%
Effect of graduated tax rates (4) 2 10
State income taxes 4 2 5
Percentage depletion 1 (5) (14)
Other, net - 1 (1)
- ----------------------------------------------------------------------------
35% 34% 34%
============================================================================
</TABLE>
The principal sources of temporary differences resulting in deferred tax
assets and tax liabilities at October 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
October 31 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Percentage depletion carryforwards $ 226,000 $ 231,000
Alternative minimum tax carryforwards 56,000 45,000
Investment tax credit carryforwards 16,000 20,000
Net operating loss carryforwards - 53,000
- -----------------------------------------------------------------------------
Total deferred tax assets 298,000 349,000
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Intangible drilling, leasehold and
other exploration costs capitalized
for financial reporting purposes but
deducted for tax purposes (906,000) (842,000)
State taxes and other (73,000) (64,000)
- -----------------------------------------------------------------------------
Total gross deferred tax liabilities (979,000) (906,000)
- -----------------------------------------------------------------------------
Net deferred tax liability $(681,000) $(557,000)
=============================================================================
</TABLE>
At October 31, 1996, the company has investment tax credit carryforwards of
$16,000 which expire in varying amounts through 2001, and has statutory
depletion carryforwards of $831,000.
<PAGE>
(5) SUPPLEMENTARY OIL AND GAS INFORMATION
Capitalized Costs
<TABLE>
<CAPTION>
October 31 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Unproved properties not being
amortized $ 733,000 $ 709,000 $ 564,000
Properties being amortized 10,793,000 10,000,000 9,626,000
Accumulated depreciation,
depletion and amortization (5,890,000) (5,399,000) (4,955,000)
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Acquisition, Exploration and Development Costs Incurred
Years Ended October 31 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Property acquisition costs,
net of sales proceeds:
Proved $ 303,000 $ 37,000 $ 592,000
Unproved 28,000 (5,000) 298,000
Exploration costs 421,000 184,000 149,000
Development costs 65,000 303,000 26,000
- -----------------------------------------------------------------------------
Total cost incurred $ 817,000 $ 519,000 $ 1,065,000
=============================================================================
</TABLE>
Major Customers and Operating Region
The company operates exclusively within the United States. Except for cash
investments, all of the company's assets are employed in, and all its revenues
are derived from, the oil and gas industry. The company had sales in excess
of 10% of total revenues to oil and gas purchasers as follows: Total
Petroleum, Inc. 19% in 1996 and 23% in 1995; and Western Gas Resources, Inc.
10% in 1995.
Oil and Gas Reserve Data (Unaudited)
In 1996, 1995 and 1994, independent petroleum engineers estimated proved
reserves for the company's significant properties which represented 60%, 60%
and 61%, respectively, of total estimated future net revenues. The remaining
reserves were estimated by the company. Reserve definitions and pricing
requirements prescribed by the Securities and Exchange Commission were used.
The determination of oil and gas reserve quantities involves numerous
estimates which are highly complex and interpretive. The estimates are
subject to continuing re-evaluation and reserve quantities may change as
additional information becomes available. Estimated values of proved reserves
were computed by applying prices in effect at October 31 of the indicated
year. The average price used was $23.96, $16.31 and $16.22 per barrel for oil
and $2.39, $1.34 and $1.38 per Mcf for gas in 1996, 1995 and 1994,
respectively. Estimated future costs were calculated assuming continuation
of costs and economic conditions at the reporting date.
<PAGE>
Total estimated proved reserves and the changes therein are set forth below for
the indicated fiscal year.
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------
Gas(Mcf) Oil(bbls) Gas(Mcf) Oil(bbls) Gas(Mcf) Oil(bbls)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Balance, November 1 5,364,000 363,000 5,188,000 363,000 3,654,000 382,000
Revisions of
previous estimates (96,000) 16,000 116,000 37,000 456,000 3,000
Extensions and
discoveries 302,000 4,000 459,000 3,000 245,000 -
Purchases of
reserves in place 796,000 23,000 97,000 29,000 1,236,000 27,000
Sales of reserves
in place - - (38,000) (24,000) - -
Production (550,000) (42,000) (458,000) (45,000) (403,000) (49,000)
- ------------------------------------------------------------------------------------
Balance, October 31 5,816,000 364,000 5,364,000 363,000 5,188,000 363,000
====================================================================================
Proved developed reserves:
Beginning of period 5,112,000 363,000 4,936,000 363,000 3,654,000 382,000
====================================================================================
End of period 5,048,000 334,000 5,112,000 363,000 4,936,000 363,000
====================================================================================
</TABLE>
The standardized measure of discounted future net cash flows from reserves is
set forth below as of October 31 of the indicated fiscal year.
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Future cash inflows $22,609,000 $13,102,000 $13,159,000
Future production and
development costs (8,047,000) (5,322,000) (5,282,000)
Future income tax expense (1,893,000) (1,050,000) (994,000)
- -----------------------------------------------------------------------------
Future net cash flows 12,669,000 6,730,000 6,883,000
10% discount factor (5,068,000) (2,557,000) (2,589,000)
- -----------------------------------------------------------------------------
Standardized measure of
discounted future net
cash flows $ 7,601,000 $ 4,173,000 $ 4,294,000
=============================================================================
</TABLE>
The principal sources of change in the standardized measure of discounted future
cash flows from reserves are set forth below for the indicated fiscal year.
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, November 1 $ 4,173,000 $ 4,294,000 $ 3,486,000
Sales of oil and gas
produced, net of
production costs (1,039,000) (709,000) (799,000)
Net changes in prices,
production and development
costs 2,641,000 (590,000) (577,000)
Revisions of quantity
estimates and other 87,000 363,000 572,000
Purchases of reserves in place 1,347,000 243,000 1,008,000
Sales of reserves in place - (151,000) -
Extensions and discoveries,
net of future development
and production costs 483,000 329,000 195,000
Accretion of discount 417,000 429,000 349,000
Net change in income taxes (508,000) (35,000) 60,000
- -----------------------------------------------------------------------------
Balance, October 31 $ 7,601,000 $ 4,173,000 $ 4,294,000
=============================================================================
</TABLE>
<PAGE>
<Auditor's Report>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CREDO Petroleum Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheets of CREDO
Petroleum Corporation and subsidiaries as of October 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended October 31, 1996.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CREDO
Petroleum Corporation and subsidiaries as of October 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended October 31, 1996, in conformity with generally
accepted accounting principles.
Denver, Colorado HEIN + ASSOCIATES LLP
January 3, 1997
</Auditor's Report>
<PAGE>
- ------------------------------------------------------------------------------
PART III.
ITEM 9. EXECUTIVE COMPENSATION
Incorporated by reference to the company's Proxy Statement to be filed with
the Commission pursuant to Regulation 14A within 120 days of the end of the
company's fiscal year 1996.
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
Incorporated by reference to the company's Proxy Statement to be filed with
the Commission pursuant to Regulation 14A within 120 days of the end of the
company's fiscal year 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference to the company's Proxy Statement to be filed with
the Commission pursuant to Regulation 14A within 120 days of the end of the
company's fiscal year 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the company's Proxy Statement to be filed with
the Commission pursuant to Regulation 14A within 120 days of the end of the
company's fiscal year 1996.
PART IV.
ITEM 13. FINANCIAL STATEMENTS AND SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) The Index to Financial Statements is set forth under Item 8.
(c) Exhibits
3(a)(i) Articles of Incorporation of CREDO Petroleum Corporation
& 4(a) (incorporated by reference to Form 10-K dated October 31, 1982).
3(a)(ii) Articles of Amendment of Articles of Incorporation, dated March 9,
1982 (incorporated by reference to Form 10-K dated October 31,
1982).
3(a)(iii) Articles of Amendment of Articles of Incorporation, dated
October 28, 1982 (incorporated by reference to Form 10-K dated
October 31, 1982).
3(a)(iv) Articles of Amendment of Articles of Incorporation dated April 18,
1984 (incorporated by reference to Form 10-K dated October 31,
1984).
3(a)(v) Articles of Amendment of Articles of Incorporation dated April 18,
1984 (incorporated by reference to Form 10-K dated October 31,
1984).
3(a)(vi) Articles of Amendment of Articles of Incorporation dated April 2,
1985 (incorporated by reference to Form 10-K dated October 31,
1985).
3(a)(vii) Articles of Amendment of Articles of Incorporation dated March 25,
1986 (incorporated by reference to Form 10-K dated October 31,
1986).
3(a)(viii)Articles of Amendment of Articles of Incorporation dated March 24,
1988 (incorporated by reference to Form 10-K dated October 31,
1989).
3(a)(ix) Articles of Amendment to Articles of Incorporation dated May 11,1990.
<PAGE>
(b)(i) By-Laws of CREDO Petroleum Corporation, as amended May 27, 1981
(incorporated by reference to Form 10-K dated October 31, 1981).
3(b)(ii) By-Laws of CREDO Petroleum Corporation, as amended May 27, 1981 and
January 30, 1985 (incorporated by reference to Form 10-K dated
October 31, 1985).
3(b)(iii) By-Laws of CREDO Petroleum Corporation, as amended October 30, 1986
(incorporated by reference to Form 10-K dated October 31, 1986).
3(b)(iv) Amendment to Article X of CREDO Petroleum Corporation's By-Laws
dated March 24, 1988 (incorporated by reference to the company's
definitive proxy dated February 5, 1988).
4(i) Shareholders' Rights Plan, dated April 11, 1989.
10(a) CREDO Petroleum Corporation Non-qualified Stock Option Plan, dated
January 13, 1981 (incorporated by reference to Amendment No. 1 to
Form S-1 dated February 2, 1981).
10(b) CREDO Petroleum Corporation Incentive Stock Option Plan, dated
October 2, 1981 (incorporated by reference to the company's
definitive proxy statement, dated January 22, 1982).
10(c) Model of Director and Officer Indemnification Agreement provided for
by Article X of CREDO Petroleum Corporation's By-Laws (incorporated
by reference to Form 10-K dated October 31, 1987).
22 CREDO Petroleum Corporation (a Colorado corporation) and its
subsidiaries SECO Energy Corporation (a Nevada corporation) and
United Oil Corporation (an Oklahoma corporation) are located at
1801 Broadway, Suite 900, Denver, CO 80202-3837.
<PAGE>
- ------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By:/s/ James T. Huffman
----------------------------
James T. Huffman,
Chief Executive Officer
By:/s/ Byron J. Sullivan
----------------------------
Byron J. Sullivan,
Vice President-Finance
Date: January 3, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Date Signature Title
---------------- ------------------------- ------------------------
January 3, 1997 /s/ William N. Beach Director
-------------------------
William N. Beach
January 3, 1997 /s/ Otto P. Butterly Director
-------------------------
Otto P. Butterly
January 3, 1997 /s/ William D. Howell Director
-------------------------
William D. Howell
January 3, 1997 /s/ James T. Huffman Chairman of the Board,
------------------------- President, Treasurer
James T. Huffman
January 3, 1997 /s/ William F. Skewes Director, Corporate
------------------------- Secretary, General Counsel
William F. Skewes
January 3, 1997 /s/ Richard B. Stevens Director
-------------------------
Richard B. Stevens
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND
IN THE COMPANY'S 10-K FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
ACCOMPANYING FOOTNOTES.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 344,000
<SECURITIES> 2,529,000
<RECEIVABLES> 143,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,287,000
<PP&E> 11,526,000<F1>
<DEPRECIATION> 5,890,000
<TOTAL-ASSETS> 9,187,000
<CURRENT-LIABILITIES> 717,000
<BONDS> 0
0
0
<COMMON> 366,000
<OTHER-SE> 7,423,000
<TOTAL-LIABILITY-AND-EQUITY> 9,187,000
<SALES> 1,703,000
<TOTAL-REVENUES> 2,287,000
<CGS> 691,000
<TOTAL-COSTS> 1,268,000
<OTHER-EXPENSES> 618,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 401,000
<INCOME-TAX> 141,000
<INCOME-CONTINUING> 260,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 260,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
<FN>
<F1>OIL AND GAS PROPERTIES, AT COST, USING FULL COST METHOD.
</FN>
</TABLE>
