_________________________________________________________________
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 JANUARY 31, 1998
Commission File Number 0-8877
CREDO PETROLEUM CORPORATION
COLORADO 84-0772991
(State of Incorporation) (IRS Employer Identification)
1801 BROADWAY, SUITE 900 80202
DENVER, COLORADO (Zip Code)
(Address of principal executive office)
303-297-2200
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, net of treasury stock, as of
February 28, 1998: Common stock, $.10 par value - 3,035,000
Preferred stock, no par value - None issued
________________________________________________________________
<PAGE>
CREDO PETROLEUM CORPORATION
INDEX TO FORM 10-Q
For Quarter Ended January 31, 1998
PART I - FINANCIAL INFORMATION (unaudited)
Consolidated Balance Sheets
As of January 31, 1998 and October 31, 1997
Consolidated Statements of Earnings and Changes in Retained
Earnings For the Three Month Periods Ended
January 31, 1998 and 1997
Consolidated Statements of Cash Flows
For the Three Month Periods Ended January 31, 1998 and 1997
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
January 31, October 31,
1998 1997
------------- ------------
<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 430,000 $ 635,000
Temporary cash investments 2,010,000 2,698,000
Receivables:
Trade 379,000 318,000
Accrued oil and gas sales 321,000 324,000
Accrued interest 2,000 3,000
Other 32,000 55,000
----------- -----------
3,174,000 4,033,000
----------- -----------
OIL AND GAS PROPERTIES, at cost,
full cost method:
Unevaluated 874,000 867,000
Evaluated 5,727,000 5,477,000
----------- ------------
6,601,000 6,344,000
----------- ------------
LONG-TERM ASSETS:
Operating rights and other intangible
assets, net 118,000 140,000
Other, net 47,000 29,000
----------- ------------
165,000 169,000
----------- ------------
$ 9,940,000 $ 10,546,000
=========== ============
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 $ 706,000 $ 1,442,000
Income taxes payable 16,000 16,000
----------- ------------
722,000 1,458,000
----------- ------------
DEFERRED INCOME TAXES 949,000 903,000
----------- ------------
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 2,723,000 2,639,000
Treasury stock, at cost, 624,000
shares in 1998 and 1997 (1,056,000) (1,056,000)
----------- -----------
8,269,000 8,185,000
----------- -----------
COMMITMENTS
----------- -----------
$ 9,940,000 $10,546,000
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Statements of Earnings And Changes in
Retained Earnings - Unaudited
Three Months Ended
January 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 436,000 $ 680,000
Operating 123,000 113,000
Interest and other 76,000 38,000
------------ -----------
635,000 831,000
------------ -----------
COSTS AND EXPENSES:
General and administrative 163,000 156,000
Depreciation, depletion and
amortization 160,000 145,000
Oil and gas production 182,000 213,000
------------ -----------
505,000 514,000
------------ -----------
INCOME BEFORE
INCOME TAXES 130,000 317,000
INCOME TAXES (46,000) (111,000)
------------ -----------
NET INCOME 84,000 206,000
RETAINED EARNINGS,
BEGINNING OF PERIOD 2,639,000 2,200,000
------------ -----------
RETAINED EARNINGS,
END OF PERIOD $ 2,723,000 $ 2,406,000
============ ===========
NET INCOME PER SHARE $ .03 $ .07
============ ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING DURING
THE PERIOD 3,042,000 3,065,000
============ ===========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Three Months Ended
January 31,
----------------------
1998 1997
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 84,000 $ 206,000
Noncash expenses included in net income:
Depreciation, depletion and amortization 160,000 145,000
Deferred income taxes 46,000 111,000
Other 3,000 3,000
Changes in assets and liabilities:
Trade receivables (61,000) (91,000)
Accrued oil and gas sales 3,000 (335,000)
Accrued interest 1,000 -
Other 23,000 -
Accounts payable (736,000) (143,000)
Income taxes payable - -
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (477,000) (104,000)
--------- ---------
INVESTING ACTIVITIES:
Oil and gas properties, net (396,000) (270,000)
Purchase of certificates of deposit and
other investments (200,000) (362,000)
Proceeds from certificates of deposit and
other investments 888,000 467,000
Changes in long-term assets (20,000) -
--------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 272,000 (165,000)
--------- ---------
FINANCING ACTIVITIES:
Purchase of treasury stock - (4,000)
--------- ----------
NET CASH USED BY FINANCING ACTIVITIES - (4,000)
--------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (205,000) (273,000)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 635,000 344,000
--------- ---------
END OF PERIOD $ 430,000 $ 71,000
========= =========
</TABLE>
See accompanying notes.
<PAGE>
CREDO PETROLEUM CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
January 31, 1998
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital and cash flow represent a
significant capital resource and source of liquidity.
At January 31, 1998, working capital was $2,452,000. Cash
flow from operating activities before working capital changes
totaled $293,000 for the three 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 1998 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 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.
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.
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. Hedges are expected to be closed by
purchasing offsetting long positions in the futures markets as
related production occurs. However, hedges may be closed earlier
if the anticipated downward price movement occurs or if the
company believes that the potential for such movement has abated.
The company's most significant hedging risk is that expected
correlations in price movements as discussed above do not occur,
and thus, that gains or losses in one market are not fully offset
to opposite moves in the other market.
<PAGE>
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 January 31, 1998, the company's hedge
position was not significant.
Oil and gas sales volume and price comparisons for the
indicated periods are set forth below.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
January 31, 1998 January 31, 1997 Percent Percent
---------------- ---------------- Volume Price
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 138,100 $ 2.14 143,400 $ 3.04 - 4% -30%
Oil (bbls) 8,600 $16.52 10,300 $23.67 -17% -30%
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
January 31, 1998 October 31, 1997 Percent Percent
---------------- ---------------- Volume Price
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 138,100 $ 2.14 128,600 $ 2.02 + 7% + 6%
Oil (bbls) 8,600 $16.52 8,700 $18.58 - 1% -11%
</TABLE>
The four percent gas volume decline and a significant portion
of the oil volume decline in the first quarter of 1998 compared
to the same quarter last year resulted due to loss of production
from the Tracy Federal #1 well, formerly the company's largest
producing well. The Tracy well has not produced commercially
since July of 1997. In July 1997, production from the well
dropped precipitously due to loading caused by insufficient
bottom hole pressures to generate adequate gas velocities in
2-7/8'' tubing to lift fluids out of the wellbore. During August
1997, the company installed 1-3/4'' coil tubing in the well.
After several unanticipated mechanical difficulties, the well
responded as expected during September and October of 1997 with
production steadily increasing as fluids were unloaded from the
wellbore.
However, in November 1997, the well suddenly ceased
producing. Tests showed that a substance consisting mostly of
iron minerals leaked off of the top of the packer and filled the
bottom of the wellbore and plugged the perforations. In an
effort to restore production, during February 1998, stage one of
a two stage operation was successfully completed to remove the
packer from the wellbore and to clean the iron material out of
the wellbore to below the perforations. Stage two of the work
involves either re-perforating the producing formation or
injecting solvent to clean out the existing perforations, and
then installing a proprietary production system to assist in
lifting liquids from the wellbore. Although management is
optimistic that production from the Tracy can be re-established,
there are substantial risks that the work will not successfully
restore commercial production.
The interest rate earned on short-term investments averaged
approximately 5.8% and 5.7% for the three months ended January
31, 1998 and 1997, respectively. Current interest rates
available to the company are approximately 5.7%.
<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, 1998 Compared to Quarter Ended
January 31, 1997
In the first quarter of fiscal 1998, net income was $84,000
compared to $206,000 in the same period last year. The decline
reflects significantly lower oil and gas prices in the current
quarter compared to the year ago period.
Total revenues decreased 24% to $635,000 in the first quarter
of 1998 compared to $831,000 in the same period last year. Oil
and gas sales decreased $244,000, or 36%, to $436,000. Refer to
the table on page 7 for details of oil and gas prices and volumes
for the applicable periods. Total gas price realizations fell
30% to $2.14 Mcf in 1998 compared to $3.04 last year. Oil price
realizations also fell 30% to $16.52 per barrel compared to
$23.67 last year. The net effect of these price declines was to
reduce oil and gas sales by $202,000. Gas volumes declined 4%
and oil volumes declined 17%. The gas volume decline resulted
when the company's largest producing well (Tracy Federal #1)
ceased producing as described in the PRODUCT PRICES, PRODUCTION,
AND INTEREST RATES section on page 7. This decline more than
offset added production from new wells drilled or acquired in the
current quarter. Oil volume declined due to loss of production
from the Tracy well and divestiture of a non-core waterflood
property. The net effect of these volume declines was to reduce
oil and gas sales by $42,000. 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.
Total costs and expenses were $505,000 in the first quarter
of 1998, compared to $514,000 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 (an annualized calculation based on
estimated production, reserves and costs at each fiscal year-end)
increased due to write-off of the Tracy well's reserves for
financial reporting purposes. The decrease in oil and gas
production expenses principally reflects higher production taxes
in the prior year quarter which were based on that quarter's
significantly higher oil and gas revenues. Income taxes were
provided at 35% in both quarters.
<PAGE>
Quarter Ended January 31, 1998 Compared to Quarter Ended
October 31, 1997
In the first quarter of fiscal 1998, net income was $84,000
compared to $71,000 in the prior quarter.
Total revenues increased 4% to $635,000 in the first quarter
compared to $609,000 in the prior quarter. Oil and gas sales
increased 3% to $436,000. 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 6% to $2.14 per
Mcf compared to $2.02 last quarter. Oil price realizations fell
11% to $16.52 per barrel compared to $18.58 in the prior quarter.
The net effect of these price changes was to reduce oil and gas
sales by $4,000. Gas volumes increased 7% and oil volumes
declined 1%. The gas volume increase reflects new wells that the
company drilled or acquired interests in during the first quarter
of 1998. The net effect of these volume changes was to increase
oil and gas sales by $18,000. 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 $505,000 in the first quarter
of 1998 compared to $499,000 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 in both quarters. Oil
and gas production costs increased principally due to the timing
of workovers and repairs. 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.
Date: March 16, 1998 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> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 430,000
<SECURITIES> 2,010,000
<RECEIVABLES> 379,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,174,000
<PP&E> 13,157,000
<DEPRECIATION> 6,556,000
<TOTAL-ASSETS> 9,940,000
<CURRENT-LIABILITIES> 722,000
<BONDS> 0
<COMMON> 366,000
0
0
<OTHER-SE> 7,903,000
<TOTAL-LIABILITY-AND-EQUITY> 9,940,000
<SALES> 436,000
<TOTAL-REVENUES> 635,000
<CGS> 182,000
<TOTAL-COSTS> 342,000
<OTHER-EXPENSES> 163,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 130,000
<INCOME-TAX> 46,000
<INCOME-CONTINUING> 84,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,000
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
