_________________________________________________________________
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, 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 August 31,
1998: Common stock, $.10 par value - 3,020,000
Preferred stock, no par value - None issued
_________________________________________________________________
<PAGE>
CREDO PETROLEUM CORPORATION
Index to Form 10-Q
For Quarter Ended July 31, 1998
_________________________________________________________________
PART I - FINANCIAL INFORMATION (unaudited)
Consolidated Balance Sheets
As of July 31, 1998 and October 31, 1997
Consolidated Statements of Earnings and Changes in
Retained Earnings For the Nine and Three Month
Periods Ended July 31, 1998 and 1997
Consolidated Statements of Cash Flows
For the Nine Month Periods Ended July 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
July 31, October 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 254,000 $ 635,000
Temporary cash investments 2,039,000 2,698,000
Receivables:
Trade 308,000 318,000
Accrued oil and gas sales 294,000 324,000
Accrued interest - 3,000
Other 30,000 55,000
------------ ------------
2,925,000 4,033,000
------------ ------------
OIL AND GAS PROPERTIES, at cost,
full cost method:
Unevaluated 1,365,000 867,000
Evaluated 5,731,000 5,477,000
------------ ------------
7,096,000 6,344,000
------------ ------------
LONG-TERM ASSETS:
Operating rights and other
intangible assets, net 76,000 140,000
Other, net 34,000 29,000
------------ ------------
110,000 169,000
------------ ------------
$ 10,131,000 $ 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 $ 729,000 $ 1,442,000
Income taxes payable 16,000 16,000
------------ ------------
745,000 1,458,000
------------ ------------
DEFERRED INCOME TAXES 1,008,000 903,000
------------ ------------
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 2,866,000 2,639,000
Treasury stock, at cost, 636,000
shares in 1998 and
624,000 shares in 1997 (1,090,000) (1,056,000)
------------ ------------
8,378,000 8,185,000
------------ ------------
COMMITMENTS - -
------------ ------------
$ 10,131,000 $ 10,546,000
============ ============
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,
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales $1,493,000 $1,570,000 $ 558,000 $ 411,000
Operating 353,000 332,000 115,000 110,000
Interest and other 165,000 179,000 58,000 93,000
---------- ---------- --------- ----------
2,011,000 2,081,000 731,000 614,000
---------- ---------- --------- ----------
COSTS AND EXPENSES:
General and
administrative 518,000 471,000 183,000 160,000
Depreciation, depletion
and amortization 552,000 450,000 202,000 150,000
Oil and gas production 592,000 594,000 228,000 194,000
---------- ---------- --------- ----------
1,662,000 1,515,000 613,000 504,000
---------- ---------- --------- ----------
INCOME BEFORE
INCOME TAXES 349,000 566,000 118,000 110,000
INCOME TAXES (122,000) (198,000) (38,000) (38,000)
---------- ---------- --------- ----------
NET INCOME 227,000 368,000 80,000 72,000
RETAINED EARNINGS,
BEGINNING OF
PERIOD 2,639,000 2,200,000 2,786,000 2,496,000
---------- ---------- ---------- ----------
RETAINED EARNINGS,
END OF PERIOD $2,866,000 $2,568,000 $2,866,000 $2,568,000
========== ========== ========== ==========
NET INCOME PER SHARE $ 0.07 $ 0.12 $ 0.02 $ 0.02
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
DURING THE PERIOD 3,037,000 3,054,000 3,033,000 3,043,000
========== ========== ========== ==========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CREDO PETROLEUM CORPORATION
Consolidated Statements of Cash Flows - Unaudited
Nine Months Ended
July 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 227,000 $ 368,000
Noncash expenses included in net income:
Depreciation, depletion and amortization 552,000 450,000
Deferred income taxes 122,000 198,000
Other 11,000 14,000
Changes in assets and liabilities:
Trade receivables 10,000 (69,000)
Accrued oil and gas sales 30,000 (53,000)
Accrued interest 3,000 3,000
Other 25,000 -
Accounts payable (713,000) (175,000)
Income taxes payable 0 (4,000)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 267,000 732,000
----------- -----------
INVESTING ACTIVITIES:
Oil and gas properties, net (1,240,000) (520,000)
Purchase of certificates of deposit
and other investments (1,997,000) (1,059,000)
Proceeds from certificates of deposit
and other investments 2,656,000 844,000
Changes in long-term assets (33,000) (5,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (614,000) (740,000)
----------- -----------
FINANCING ACTIVITIES:
Purchase of treasury stock (34,000) (44,000)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (34,000) (44,000)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (381,000) (52,000)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 635,000 344,000
----------- -----------
END OF PERIOD $ 254,000 $ 292,000
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
CREDO PETROLEUM CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
July 31, 1998
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital and cash flow represent a
significant capital resource and source of liquidity. At third
quarter end, working capital was $2,180,000. Cash flow from
operating activities before working capital changes totaled
$912,000 for the nine months. Cash flow and working capital were
used to fund net oil and gas property expenditures.
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 third 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 energy 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 July 31, 1998, approximately 30% of the
company's estimated gas production through March 1998 was hedged
at an average price of approximately $2.51 per Mcfg. Net gains
and losses on hedges during the nine months ended July 31, 1998
were not significant.
Oil and gas sales volume and price comparisons for the
indicated periods are set forth below.
<TABLE>
<CAPTION>
Nine Months Nine Months Percent Percent
Ended July 31, 1998 Ended July 31, 1997 Volume Price
------------------- -------------------
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 548,000 $ 2.05 416,700 $ 2.26 +31.5% - 9.2%
Oil (bbls) 25,700 $14.31 30,200 $20.81 -14.8% -31.3%
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Percent Percent
Ended July 31, 1998 Ended July 31, 1997 Volume Price
------------------- -------------------
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 223,100 $ 2.00 128,800 $ 1.79 +73.2% +11.9%
Oil (bbls) 9,000 $12.54 9,700 $18.65 - 7.9% -32.8%
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Percent Percent
Ended July 31, 1998 Ended April 30, 1998 Volume Price
------------------- --------------------
Product Volume Price Volume Price Change Change
- ------- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gas (Mcf) 223,100 $ 2.00 188,800 $ 1.96 +18.1% + 2.1%
Oil (bbls) 9,000 $12.54 8,200 $13.94 + 8.9% -10.1%
</TABLE>
Significant increases in gas production for all periods reflect
(i) sales from the recently drilled Cline #11-1 well which was placed
on production during the second quarter of 1998, (ii) two recently
acquired wells which were successfully re-worked and in which the
company owns a 75% or greater interest, and (iii) production from the
company's Tracy Federal #1 well on which stage two work is
progressing to restore commercial production.
The Cline #11-1 well is an 8,900 foot Morrow sand well located
in Ellis County, Oklahoma in which the company owns a 48% working
interest and is the operator. The well encountered five separate
productive Morrow sand intervals but is completed naturally (without
acid or fracture stimulation) in only the lower-most of the five
sands. As of September 1998, the well is producing at a daily rate
of approximately 1.7 million cubic feet of gas, 17 barrels of
condensate and no water on a 12/64-inch choke at a flowing tubing
pressure of 2,000 psi and a flowing casing pressure of 2,150 psi.
The company has recently acquired two wells and installed a
proprietary gas lift system designed by company personnel. The
system is working as anticipated and has increased production from
uneconomic levels to over 130 Mcfgd on each well. The company owns
75% or more of each well.
Stage two of the previously reported work to restore commercial
production on the Tracy Federal #1 well is underway and involves
drying out the formation and then 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. The well is currently
producing about 230 thousand cubic feet of gas per day and is being
assisted by artificial gas injection in order to lift fluids out of
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.
<PAGE>
The decline in oil volumes is due to normal declines, certain
wells being shut-in due to low oil prices, and divestiture of a
non-core waterflood property.
The interest rate earned on short-term investments averaged
approximately 5.8% for the nine month periods ended July 31, 1998 and
1997. The interest rate earned in the third quarter of 1998 did not
significantly vary from the same quarter last year or the immediately
preceding quarter. Current interest rates available to the company
are under 6%.
INCOME TAXES
The company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS 109), which requires the asset and liability
method of accounting for deferred income taxes. Deferred tax assets
and liabilities are determined based on the temporary differences
between the financial statement and tax basis of assets and
liabilities. Deferred tax assets or liabilities at the end of each
period are determined using the tax rate in effect at that time.
The total future deferred income tax liability under SFAS 109 is
extremely complicated for any oil company to calculate due in part to
the long-lived nature of depleting oil and gas reserves.
Accordingly, the liability is subject to continual recalculation,
revision of the numerous estimates required, and may change
significantly in the event of such things as major acquisitions,
divestitures, changes in reserve estimates, changes in reserve lives,
and changes in tax rates or tax laws.
RESULTS OF OPERATIONS
Nine Months Ended July 31, 1998 Compared to Nine Months Ended July
31, 1997
For the first nine months of 1998, net income was $227,000
compared to $368,000 last year. The decline primarily reflects
significantly lower oil and gas prices compared to last year as is
shown in the table on page 7.
Total revenues fell 3% to $2,011,000 in the first nine months of
1998 compared to $2,081,000 last year. Oil and gas sales decreased
$77,000, or 5%, to $1,493,000. 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 9.2% to $2.05 per Mcf in 1998
compared to $2.26 last year. Oil price realizations fell 31.3% to
$14.31 per barrel compared to $20.81 last year The net effect of
these price declines was to reduce oil and gas sales by $282,000.
Gas volumes increased 31.5% and oil volumes declined 14.8%. The net
effect of these volume changes was to increase oil and gas sales by
$205,000. Oil and gas volume variances are discussed below the table
on page 7. Operating income increased as a result of additional
operated wells added through drilling and acquisitions. Interest and
other income decreased in the current period due to a reduction in
short term investments.
Total costs and expenses were $1,662,000 in the first nine
months of 1998 compared to $1,515,000 last year. General and
administrative expenses increased due to inflationary pressures and
the timing of certain expenditures. Increased depreciation,
depletion and amortization expense primarily reflects increased
production volumes as well as increased investments in oil and gas
properties. Oil and gas production expenses remained virtually
unchanged. Income taxes were provided at 35% in both periods.
<PAGE>
Quarter Ended July 31, 1998 Compared to Quarter Ended July 31, 1997
In the third quarter of fiscal 1998, net income was $80,000
compared to $72,000 in the same period last year.
Total revenues increased 19% to $731,000 in the third quarter
compared to $614,000 last year. Oil and gas sales increased 35.8% to
$558,000. 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 11.9% to $2.00 per Mcf compared to $1.79 last
year. Oil price realizations fell 32.8% to $12.54 per barrel
compared to $18.65 last year. The net effect of these price changes
was to decrease oil and gas sales by $32,000. Gas volumes increased
by 73.2% while oil volumes declined 7.9%. The net effect of these
volume changes was to increase oil and gas sales by $179,000. Oil
and gas volume variances are discussed below the table on page 7.
Operating income increased as a result of additional operated wells
added through drilling and acquisitions. Interest and other income
decreased in the current quarter due to a reduction in short term
investments.
Total costs and expenses were $613,000 in the third quarter of
1998, compared to $504,000 last year. General and administrative
expenses increased due to inflationary pressures and the timing of
certain expenditures. Increased depreciation, depletion and
amortization expense primarily reflects increased production volumes
as well as increased investments in oil and gas properties. The
increase in oil and gas production expenses also reflect increased
production volumes as well as increased costs. Income taxes were
provided at 35% in both quarters.
Quarter Ended July 31, 1998, Compared to Quarter Ended April 30, 1998
In the third quarter of fiscal 1998, net income was $80,000
compared to $63,000 in the prior quarter.
Total revenues increased 13.5% to $731,000 in the third quarter
compared to $644,000 in the prior quarter. Oil and gas sales
increased 15% to $558,000. 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 2% to $2.00 per Mcf compared to
$1.96 in the prior quarter. Oil price realizations fell 10.1% to
$12.54 per barrel compared to $13.94 last quarter. The net effect of
these price changes was to decrease oil and gas sales by $4,000. Gas
volumes increased by 18% and oil volumes increased 9%. The net
effect of these volume changes was to increase oil and gas sales by
$78,000. Oil and gas volume variances are discussed below the table
on page 7. Operating income decreased slightly due to certain wells
being shut-in because of low oil prices. Interest and other income
decreased in the current quarter due to a reduction in short term
investments.
<PAGE>
Total costs and expenses were $613,000 in the third quarter of
1998 compared to $543,000 in the prior quarter. General and
administrative expenses increased due to inflationary pressures and
the timing of certain expenditures. Increased depreciation,
depletion and amortization expense primarily reflects increased
production volumes as well as increased investments in oil and gas
properties. The increase in oil and gas production expenses also
reflects increased production volumes as well as increased costs.
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: September 14, 1998 By:
/s/ James T. Huffman
-------------------------
James T. Huffman
President and
Chief Executive Officer
By:
/s/ Alford B. Neely
-------------------------
Alford B. Neely
Vice President
and Chief Financial Officer
<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-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 254,000
<SECURITIES> 2,039,000
<RECEIVABLES> 602,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,925,000
<PP&E> 14,002,000
<DEPRECIATION> 6,906,000
<TOTAL-ASSETS> 10,131,000
<CURRENT-LIABILITIES> 745,000
<BONDS> 0
0
0
<COMMON> 366,000
<OTHER-SE> 8,012,000
<TOTAL-LIABILITY-AND-EQUITY> 10,131,000
<SALES> 1,493,000
<TOTAL-REVENUES> 2,011,000
<CGS> 592,000
<TOTAL-COSTS> 1,144,000
<OTHER-EXPENSES> 518,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 349,000
<INCOME-TAX> 122,000
<INCOME-CONTINUING> 227,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 227,000
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
